FEDERAL COURT OF AUSTRALIA

Maylord Equity Management Pty Ltd v Parazelsus Limited [2013] FCA 1219

THE COURT ORDERS THAT:

1.    The Respondent’s application for further security for costs be dismissed.

2.    The Respondent’s application for costs thrown away be reserved to the final hearing.

3.    The Applicant be at liberty to file a Further Amended Statement of Claim on or before Thursday 28 November 2013.

4.    The Respondent file its defence to any Further Amended Statement of Claim on or before Friday 10 January 2014.

5.    The Applicant file and serve a Statement of Issues by Monday 20 January 2014.

6.    The Respondent file and serve a Statement of Issues, if any, by Thursday 30 January 2014.

7.    The matter be listed for directions on Wednesday 5 February 2014 at 9.30 am.

8.    The costs of the Respondent’s application for further security for costs be reserved to the final hearing.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    Before the Court are two applications brought by the respondent (‘Parazelsus’). The first is an application for security for costs filed on 27 September 2012 pursuant to the provisions of s 1335 of the Corporations Act 2001 (Cth) and in the alternative, s 56 of the Federal Court of Australia Act 1976 (Cth) or r 19.01 of the Federal Court Rules 2011(Cth) (‘the Rules’).

2    Such application was part heard, having first been before Justice North on 10 December 2012. On 4 February 2013, his Honour ordered inter alia that the applicant (‘Maylord’) provide security for costs in the amount of $20,000 by 4.00 pm on 4 March 2013, and that Parazelsus’ application for security for costs be otherwise adjourned. The purpose of adjourning the application appears to be so as to defer the consideration of further security for costs until after the parties attended mediation.

3    On 28 February 2013, Maylord paid the sum of $20,000 for security for costs to the Court. The subsequent mediation, which took place in May 2013, was unsuccessful. Accordingly, the part heard security for costs application is now pressed by Parazelsus. It seeks a further $180,000 in security from Maylord.

4    The second application arises out of the filing of an amended statement of claim by the applicant (‘Maylord’) on 20 August 2013. Parazelsus seeks its costs thrown away in the preparation of its amended defence and associated legal advice as a lump sum pursuant to r 40.02 of the Rules.

BACKGROUND

Security for costs

5    By the amended statement of claim, Maylord alleges that it entered into an agreement with Parazelsus following various arrangements between the parties in the period of 4 February 2009 to 7 September 2010 (‘the Agreement’). The terms of the Agreement are said to have been established through those various arrangements and in a written agreement dated 7 September 2010.

6    The pleaded facts relating to the background to the Agreement are at best convoluted. For the purposes of the applications presently before the Court, it suffices to note some key terms of the Agreement alleged by Maylord as follows:

(a)    Maylord would introduce and promote the acquisition of Victoria Body Corporate Services Pty Ltd (‘VBCS’) to Parazelsus;

(b)    Maylord would receive a certain shareholding in VBCS;

(c)    Maylord would provide to Parazelsus and VBCS advisory services;

(d)    Parazelsus would pay Maylord $12,500 per month from 1 April 2010 until VBCS was listed on the stock exchange, but at least for a period of 12 months.

7    Maylord alleges that two companies were incorporated for the purposes of acquiring VBCS, namely Ztrata Limited and Ztrata Capital Limited. Shares in Ztrata Limited are said to have been held by Ztrata Capital Limited, a separate entity and Maylord in different proportions. Shares in Ztrata Capital Limited are said to have been held by Parazelsus, a separate entity and Maylord in different proportions. It is currently unclear whether the separate entity referred to is indeed the same separate entity.

8    Critically, Maylord further alleges that, in consideration for Maylord’s work, Parazelsus agreed to grant shares in Ztrata Limited and Ztrata Capital Limited such that Maylord would have an interest of 10% in VBCS.

9    Maylord claims damages against Parazelsus for breach of the Agreement and declarations that Parazelsus has engaged in misleading or deceptive conduct. Additional relief is sought in the originating application, however it is currently unclear whether such relief is still sought by Maylord in light of the substantial amendments to the statement of claim.

10    By an amended defence filed 14 September 2013, Parazelsus denies the claims made in the amended statement of claim, subject to admitting that it entered into an agreement with Maylord on 7 September 2010 and other limited admissions concerning communications between the parties.

11    The application for security for costs is supported by three affidavits of the solicitor on the record for Parazelsus, Mr Van Angelo Moulis, sworn on 24 September 2012, 30 November 2012 and 11 October 2013. Mr Moulis estimates in his most recent affidavit that the costs for defending the proceedings will be $408,490 excluding GST.

12    The sole director of Maylord, Mr Peter Batterham, has sworn four affidavits in the proceeding. In his affidavit sworn 24 October 2013, Mr Batterham deposes to the effect that the Agreement was entered into by Maylord on behalf of the Batterham Family Trust (‘the Trust’) and the Batterham Retirement Fund (‘the Fund’). Maylord is the trustee of the Trust and the Fund.

13    Maylord claims to be impecunious, owning no beneficial interest in any real estate in Australia, nor have any assets. Further, Maylord has a paid up capital of $3.00, and does not transact any business in its own right.

14    It is not disputed that, by way of a settlement deed dated 4 July 2011, a company associated with VBCS has agreed to pay Maylord the total sum $450,000. Payments of $20,000 and $175,000 were paid to Mr Batterham’s personal bank account on 5 and 14 July 2011 respectively. The balance of the settlement sum, being $250,000, is being paid by way of monthly instalments to Mr Batterham of $6,945. The final such payment is due to occur in June 2014.

15    Based upon these payments, Parazelsus disputes Maylord’s claim that it is impecunious. In response Mr Batterham has deposed that of the lump sum payments of $200,000, approximately $110,000 has been used to pay various debts, including for consultancy, accountancy and legal services, a credit card and an overdraft. Further, Mr Batterham asserts that, as at the hearing before North J on 10 December 2012, he has incurred legal expenses in prosecuting this proceeding in the approximate sum of $85,000. Accordingly all of $200,000 received by Mr Batterham in July 2011 has been exhausted.

16    Mr Batterham also claims to be impecunious. The tax returns prepared for him show that his taxable income for the four financial years from 2007-2008 until 2010-2011 has been less than $20,000 each year. Mr Batterham resides in an apartment, the rent for which is $2,200 per month. He has sold his motor vehicle and receives an old age pension of $247.65 per fortnight. He has an overdraft limit on his bank account of $50,000, and a credit limit of $32,000 on his visa card account.

17    Parazelsus submits that the application for security for costs has been brought in a timely manner; the prospect of such an application was first raised in correspondence on 15 August 2012 at about the time that Parazelsus filed its appearance. It submits that the communication between the parties has been ‘irregular’, in part due to the refusal of Maylord to engage in an attempt to find a compromise to the issue of security.

18    Maylord opposes the application. It points to the fact that no application has been made by Parazelsus to strike out its statement of claim and that Parazelsus does not dispute the existence of an agreement between the parties made on 7 September 2010. Maylord submits that the application for security for costs should be viewed as one being made against Mr Batterham personally given that he is the sole director and shareholder of Maylord and the sole beneficiary of the Fund and the Trust.

Costs thrown away

19    As referred to above, Maylord filed an amended statement of claim on 20 August 2013. The amendments made to the original statement of claim were substantial. Parazelsus filed its defence to the amended statement of claim on 18 September 2013.

20    The solicitors for Parazelsus instructed Mr Michael Dudman, a costs assessor, to conduct an assessment of Parazelsus’ legal costs and disbursements thrown away as a result of the amendments made to Maylord’s statement of claim. Mr Dudman assessed the costs thrown away to be approximately $70,000 as set out in his affidavit sworn 28 October 2013.

21    At the hearing, Maylord sought to reserve its position with regard to Mr Dudman’s assessment as counsel for Maylord had not had an opportunity to review Mr Dudman’s affidavit.

CONSIDERATION

Security for costs

22    Section 56 of the Federal Court of Australia Act 1976 (Cth) empowers the Court, in its discretion, to award security in such amount as the Court considers appropriate. The only relevant limitation on the Court’s discretion is that the power must be exercised judicially: Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 (‘Bell Wholesale’) at 3. The Court is mindful that the financial interests of Mr Batterham, Maylord, the Fund and the Trust appear to be closely tied, if not inextricable. As was stated by Lindgren J in Knight v Beyond Properties Pty Ltd [2005] FCA 764 at [32]:

Many cases can be cited for the proposition that there is a disinclination to order an applicant who is a natural person to provide security, at least, in the absence of some factor in addition to impecuniosity.

23    In the present circumstances however, the party against whom security for costs is sought is a corporation, and the substantive proceeding has been brought in the name of Maylord. For this reason, the financial circumstances of Mr Batterham are strictly irrelevant for the purposes of considering whether security for costs should ordered. Nevertheless, the Court considers that the assets and financial position of Mr Batterham are matters relevant to the Court’s discretion in determining the application as will become apparent.

24    The strength of Maylord’s claim is a relevant consideration in deciding whether to grant security. It is significant that Parazelsus has admitted the making of an agreement with Maylord. Whether that agreement was supplemented with the additional terms alleged by Maylord remains for determination. However, the parties were engaged in a contractual relationship and that relationship has ended with the result that Maylord claims that it is entitled to damages. The amended defence filed to the amended statement of claim is unhelpful in that it does not outline the real nature of any defence; rather it relies upon strict denials to most paragraphs in the statement of claim.

25    On the facts outlined above, the Court is satisfied that Maylord is impecunious. It would be unable to meet any meaningful order for security for costs made against it, especially in the amount sought of $180,000. As already referred to, the company is not trading, has no assets and has a paid up capital of $3. It follows that allowing the application would in all probability stifle the litigation and deny Maylord of the opportunity of presenting its claims.

26    The usual position is that a court will not decline an application for security for costs against a company solely on the basis that it will frustrate the litigation unless it is also shown that those whom stand to benefit from the litigation are also impecunious. As was found by Sheppard, Morling and Neaves JJ in Bell Wholesale at 4:

[I]t 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.

27    The evidence before the Court indicates that Mr Batterham would not be able to meet any meaningful order for security for costs against Maylord. It was accepted by Maylord that the possible beneficiaries of the Trust could extend to family members of Mr Batterham, but it submitted that Mr Batterham would be the only person to benefit from the litigation. In the absence of Mr Batterham being cross-examined by Parazelsus, there is insufficient evidence for the Court to conclude that any person other than Mr Batterham would benefit from the litigation.

28    Accordingly, the Court declines to make any further order for security for costs as to do so would be inimical to the interests of justice.

Costs thrown away

29    The Court accepts, and it is not challenged by Maylord, that costs have been thrown away by Parazelsus as a result of the amendments to the original statement of claim. Parazelsus referred the Court to the decision of Mansfield J in Dunstan v Human Rights and Equal Opportunity Commission (No 3) [2006] FCA 916. That case however concerned the costs of a proceeding that had been determined. The issue for his Honour to decide was whether the costs to be paid by the applicant should be fixed as a gross sum or taxed in the usual way.

30    The issue presently before the Court is whether an order for costs thrown away should be made at this preliminary stage of the proceeding or whether the costs should be reserved to the hearing. For the reasons set out with respect to the security for costs application, the making of an order for Parazelsus’ costs thrown away against Maylord at this stage of the proceeding would stifle the litigation. Accordingly, the costs thrown away by virtue of the amendments to the original statement of claim will be reserved to the hearing.

ADDITIONAL MATTERS

31    The Court also considers that it is appropriate for the costs of the present applications be reserved to the hearing.

32    Upon reviewing the amended statement of claim, the Court observed certain deficiencies which were brought to the attention of counsel for Maylord. The deficiencies lie in the fact that whilst there is a reference to various statutory claims for misleading or deceptive conduct, there is no pleading setting out the alleged damage flowing from such conduct. Counsel for Maylord indicated that this was an oversight which would be corrected.

33    Accordingly, the Court will make orders granting leave to Maylord to file a further amended statement of claim, and establishing a timetable for the further conduct of the proceeding.

Associate:

Dated:    21 November 2013