FEDERAL COURT OF AUSTRALIA

Professional Vending Services Pty Ltd v Christou [2010] FCA 580

THE COURT ORDERS THAT:

1.                  The applicant provide security for the first and second respondents’ costs up to and including the first day of trial in the amount of $42,000, to be paid by instalment as follows:

(a)        $10,000 by 24 June 2010;

(b)        $10,000 by 19 July 2010;

(c)        $10,000 by 16 August 2010; and

(d)        $12,000 by 13 September 2010.

2.                  Payments made under Order 1 are to be made and the monies are to be held in a manner agreed to in writing by the first applicant and the first and second respondent on or before 24 June 2010, or if no such agreement is made, in a manner satisfactory to a Registrar of the Court. 

3.                  If the first applicant is in default of a payment required by Order 1 for 14 days or longer, unless the Court otherwise orders, the first applicant’s application shall thereupon be stayed.

4.                  Orders 2 and 3 of the orders made by Registrar Luxton on 1 March 2010 be set aside.

5.                  The costs of and incidental to the first and second respondents’ notices of motion dated 17 February 2010 and 18 March 2010 be reserved.  

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

introduction

1                     Professional Vending Services Pty Ltd (“Professional Vending”) and Amina & Asfalia Pty Ltd (together “the applicants”) have brought proceedings against the first respondent Jim Christou (“Christou”) and others.  The applicants allege that Christou breached his employment contract, failed to comply with fiduciary obligations and has misused confidential information.

2                     There are other related parties including the second respondent, Australian Automatic Vending Company Pty Ltd (“AAVC”). 

3                     By notice of motion dated 17 February 2010, Christou and AAVC sought an order that Professional Vending provide security for the costs of Christou and AAVC in the sum of $103,000.  On 1 March 2010, a Registrar of this Court dismissed the application for security for costs and ordered that the costs of that application be paid by Christou and AAVC.

4                     By notice of motion dated 18 March 2010, Christou and AAVC seek a review, pursuant to s 35A(5) of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”) of the orders made by the Registrar. 

5                     After some delay (arising from a dispute between the parties as to whether the notice of motion could be dealt with on the papers or required an oral hearing), it has been resolved by agreement that I determine the notice of motion on the papers.  For that purpose, written submissions were provided and have been taken into account.

6                     For the reasons which follow, I have determined that Professional Vending should provide security for costs in the sum of $42,000 payable by four instalments.

Section 1335 of the corporations act

7                     The Court has power to order security under s 56 of the Federal Court Act, but the matter was argued before me and is to be resolved under s 1335(1) of the Corporations Act 2001 (Cth) (“the Corporations Act”).  That provision 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.   

8                     As the authorities demonstrate, before the discretion provided by s 1335 is enlivened, a threshold condition for the exercise of the power needs to be satisfied.  That jurisdictional condition is whether:

…there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful.

9                     Courts have often applied the test formulated by Von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205, 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 was 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 the 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 taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security.

10                  In Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93 at [12]-[15] Maxwell P and Buchanan JA expressed the view that it would be wrong to substitute a judicial exposition for the words of the statute itself.  As their Honours observed, the language of the statutory test is clear and the courts must address the question which the section poses, namely:

Is there reason to believe that the corporation will be unable to pay the defendant’s costs?

11                  I respectfully adopt and will apply the approach of Maxwell P and Buchanan JA set out at [15]-[16] of their judgment, as follows:

15      The phrase ‘reason to believe’ is the touchstone of jurisdiction. It requires a rational basis for the belief – and no more. The wording adopted may be contrasted with other familiar formulations such as ‘If the court is satisfied that ... ‘or ‘If in the view of the court it is likely that ...’ The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a “real risk”.) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation’s financial affairs.

16      It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation’s impecuniosity. The provision equips the court with the means to require that the defendant be secured against that risk. 

         (citations omitted)

12                  The applicant for security for costs bears the onus of satisfying the Court that the threshold condition is satisfied: Livingspring [18]-[23].

13                  As Jessup J said in Acohs Pty Ltd v Ucorp Pty Ltd [2006] FCA 1279 at [10], whether a corporation “will be unable to pay” involves two considerations of its own.  The first is the need to fix the time at which the applicant’s inability, or apprehended inability, is notionally to be assessed.  That, as von Doussa J said in Beach Petroleum, is an element which requires an opinion to be formed about the financial position of the applicant “at the time of judgment and immediately thereafter”: at 205.  The second consideration relates to the range of assets to which recourse might be had for the purpose of meeting an adverse costs order.  For that purpose, Jessup J took account of those assets which might be immediately realised, together with those which could be realised in sufficient time to enable the applicant to comply with a costs order in the usual terms.  I respectfully agree with that approach.  For convenience, I will refer to the kind of assets Jessup J has identified as liquid assets.

is the threshold condition satisfied?

14                  Christou and AAVC rely upon evidence put before me that Professional Vending has paid up share capital of only $100 and does not own any real property in Victoria.  Further they point to a fixed and floating charge registered on 22 September 2008 by the ANZ bank.  Reliance is also placed upon the fact that in or about February 2010, Professional Vending conducted a sale of its stock at discount prices which are said to be unprecedented.  For these reasons, Christou and AAVC say they are concerned that they will not be able to recover their costs should a costs order in their favour be made at trial.

15                  A number of affidavits of Mr Di Donato, the Managing Director of Professional Vending, have been filed which address the financial position of Professional Vending.  By reference to that evidence, it is apparent that from July 2008, Professional Vending took over a business owned and operated by the second applicant Amina & Asfalia Pty Ltd.  That business involves the purchase and sale of vending machines.

16                  According to Mr Di Donato, the financial performance of the business had been poor and it had been trading at a significant loss.  Professional Vending has taken steps to reduce the expenses associated with the business and to improve its trading performance. 

17                  In its first 12 months of operation (1 July 2008 to 31 June 2009) Professional Vending incurred a loss of $255,696.  The trading position of Professional Vending has improved and financial statements provided to the Court show that in the period 1 July 2009 to 31 March 2010, net profit was $144,464.  Mr Di Donato expects that for the financial year ending
30 June 2010, Professional Vending should return a profit of not less than $160,000 and in all likelihood significantly higher.  He has deposed that a number of substantial new orders are expected and that new stock is in transit in order to meet the growth and demand for products from regular and new customers.

18                  Further, Mr Di Donato explains that the sale of discounted product ended on
28 February 2010.  The reason for the sale was to clean out old and slow moving stock.  The sale was very successful and resulted in the acquisition of a number of new customers.  He further identifies that the charge to the ANZ bank relates to an overdraft facility with a $100,000 limit. 

19                  The financial information which accompanied Mr Di Donato’s affidavits shows that as at March 2010, Professional Vending had net assets of $693,159; a reduction from its net assets of $1,087,073 as at 30 June 2009.

20                  Of central importance to the task before me is an evaluation of the capacity of Professional Vending to meet any adverse cost order at the time such order would need to be complied with.  That question involves an identification of the sum likely to be ordered for costs, when judgment will likely be given in this case and what liquid assets are likely to be available at that time.

21                  The application seeks security for the costs of Christou and AAVC in defending the action brought against them, up to and including the first day of trial.  The solicitor for Christou and AAVC has, in very general terms, calculated $103,000 to be the reasonable costs likely to be incurred.  That estimate is challenged in an affidavit by Margaret Goulay, a cost consultant and solicitor with 30 years experience in legal costing.  Her evidence is that $29,917 represents a reasonable sum for the costs likely to be incurred.  Both parties have made submissions as to the estimates which have been provided to the Court.  In particular Christou and AAVC have made submissions challenging a limited number of estimates made by Ms Goulay. 

22                  I have considered the cost estimates provided.  In large part I prefer the evidence of Ms Goulay, but I have accepted some of the challenges made to her estimates in the submissions filed on behalf of Mr Christou and AAVC.  In particular, I have allowed an extra $3,000 for the review and consideration of the very large number of affidavits which are expected to be filed by Professional Vending.  Further, given preliminary indications that the trial will take 10 days, I consider that an extra 3 days for preparation for counsel should be provided for at $3,000 per day.  For those reasons I will proceed on the basis that $42,000 is an appropriate estimate for the likely costs of Christou and AAVC for defending the claims made against them over the period 17 February 2010 (when an application for security for costs was first made) until and including the first day of trial.

23                    The next matter to consider is when it is likely that judgment will be given in this case.  The proceeding has not yet been listed for hearing but I will proceed on the assumption that judgment will be provided in or about March 2011.

24                  The principal questions, then, are:

(a)   what liquid assets are likely to be available to Professional Vending to pay a sum of $42,000 in or about March 2011? and

(b)   is there a reason to believe that Professional Vending will be unable to pay that sum at that time?

25                  The financial material provided to me is limited.  In particular I have not been provided with any cash flow projections and do not have any financial reports for any period beyond the end of March 2010.  In those circumstances, a conservative approach is appropriate.

26                  In assessing the capacity to pay, I have had particular regard to the cash flow position of Professional Vending as set out in its balance sheet of June 2009 to March 2010 under the item “Bank-main account”.  I infer, given the substantial negative balance in that account for some of the months in question, that this is the account to which the $100,000 overdraft facility relates.  I consider it appropriate to take into account the capacity of Professional Vending to access that overdraft in assessing its capacity to pay.  In the period in question, the available funds (including from the overdraft facility) varied from a high of $152,721 (November 2009) to a low of $17,806 (January 2010).  Over the nine months in question, the average amount available was $110,399. 

27                  I need, however, to take into account that the cash flow position (represented by the figures to which I have just referred), is unlikely to reflect the additional extraordinary expenses that Professional Vending will be incurring in the period to March 2011.  In that period, Professional Vending will also need to address its own legal costs of this proceeding. 

28                  Experience suggests that in relation to a 10 day trial in the Federal Court, legal costs will be very substantial and not readily met by a company whose expectation is for an annual profit of something in excess of $160,000.  Furthermore, if Professional Vending is the subject of adverse cost orders, it is likely that those orders will also include the costs of the trial and also the entirety of the costs of the third respondent.  It is likely that those amounts will dwarf the $42,000 which is here under consideration and all of those costs will fall due at or about the same time, should Professional Vending be unsuccessful.

29                  Professional Vending has other current assets which may enhance its cash position.  In particular the financial statements show that as at 30 June 2009 it had trade debtors of $300,825. As at 31 March 2010 its trade debtors were $496,342.  That increase in trade debtors suggests that sales have been improving and that payment from debtors will increase.  On the other hand, current liabilities and in particular trade creditors have tripled.  Overall, that analysis suggests a negative impact upon the cash flow position of Professional Vending in the period to March 2010 and at least for some months beyond.

30                  As the authorities to which I have referred indicate, I need to make a risk assessment and, of necessity, that assessment is likely to be imprecise.  Taking a practical common sense approach, it seems to me that there is a risk that Professional Vending will not be able to meet an adverse costs order of $42,000 in or about March 2011, in the context of it being the unsuccessful litigant.  In that respect I have given particular regard to the likely cash flow position of Professional Vending at that time, together with the likelihood that (should it be unsuccessful in the proceeding) it will at or about the same time be required to meet other, very substantial, orders for costs.  Bearing in mind that the threshold is low,  I am satisfied that there is reason to believe that Professional Vending will be unable to pay the costs of Christou and AAVC which are the subject of the application of those respondents for an order for security for costs.  On that basis, the threshold condition is satisfied and I turn to consider the question of the Court’s discretion.

discretion

31                  The discretion of the Court is unfettered and it is not possible or appropriate to attempt to list all of the matters relevant to its exercise. The factors will vary from case to case: Acohs at [11].

32                  On occasions, single judges of this Court have provided guidelines which in an appropriate case may be of assistance.  Some of those guidelines are collected and set out by Jessup J in Acohs at [12].  I have had regard to those guidelines and have identified from them those factors which are of relevance to a case of this kind.  I have also had regard to any submissions made by the parties in relation to the exercise of discretion. 

33                  There are two considerations most relevant to the exercise of my discretion.  The first is the extent of the risk that Professional Vending will not be able to meet an order for costs and secondly the extent of any injustice that might be involved in imposing upon Professional Vending an additional financial burden, in circumstances where ultimately the Court may find that Professional Vending has, and has had from the outset, a good claim.

34                  On the material before me, it is clear that Professional Vending is not impecunious.  It seems to be operating a business which was recently struggling but whose performance is on the improve.  Its profits are modest, but it has net assets of about $700,000. 

35                  In the relevantly short period since 30 June 2008, when Professional Vending took over the business, the directors of its holding company have provided substantial sums by way of unsecured loans.

36                  Mr Di Donato has given some detail about his expectation of new custom and significant increases in potential sales.  Whilst it may be hoped that that potential will bear fruit, I cannot place much weight upon it. 

37                  It seems to me that a business which has performed poorly but which is now improving its profitability with an expectation of an annual profit of not less than $160,000 is not well placed to cope with the likely costs of a 10 day proceeding in the Federal Court.

38                  In that context, I consider the extent of the risk of an inability to meet an adverse costs order to be significant.  It may well be the case that in such circumstances, Professional Vending will have the benefit of the provision of further monies by the directors of its holding company who obviously stand behind it.  In the exercise of my discretion I would have taken into account any personal undertaking given by such persons.  However no such undertakings have been offered.

39                  On the other hand, I do take into account that Professional Vending appears to be a viable trading enterprise with a legitimate business.  That business will not be assisted by the imposition upon it of additional financial burdens which it may find difficult to meet. 

40                  The matter is finally balanced.  I am reluctant to impose financial commitments upon Professional Vending but I am also conscious of the risk that Christou and AAVC may be unjustly deprived of their costs should they succeed.  On balance I have decided that an order for security for costs should be made in the sum of $42,000.  In order to limit the financial burden upon Professional Vending that may be imposed, I consider that security for costs should be provided in a number of stages.

41                  I consider that the staged payments should be as follows:

(a)        $10,000 by 24 June 2010;

(b)        $10,000 by 19 July 2010;

(c)        $10,000 by 16 August 2010; and

(d)        $12,000 by 13 September 2010.

42                  The Court has a wide discretion on the question of costs.  Whilst I appreciate that the usual order is that costs follow the event, I have determined that circumstances exist that make it appropriate that the costs of the notice of motion should be reserved.  The determination of the application for security is finely balanced.  No criticism can be made of the opposition to it by Professional Vending.  More significantly, I consider that the cost of the application should ultimately fall on the losing party or parties to the litigation as a whole.  In a finely balanced security for costs application, it would be harsh that a successful party at trial, who had been ordered to pay security for costs but against whom no cost order is ultimately made, should bear the burden of the costs of the application for security.  As there are multiple parties in this proceeding, including both an applicant and a respondent beyond those involved in the application for security for costs, I will reserve costs of the application on the expectation that those costs will ultimately be dealt with by reference to the intent which I have just expressed. 

43                  It is appropriate that the question of the costs before the Registrar be dealt with consistently with the approach I have taken to the question of the costs of the application before me.  For that reason I will make an order vacating the order made by the Registrar in relation to costs and substitute for it an order that costs relating to the application before the Registrar be reserved.

Associate:

Dated:         10 June 2010