FEDERAL COURT OF AUSTRALIA

Basetec Services Pty Ltd v Leighton Contractors Pty Ltd [2014] FCA 991

THE COURT ORDERS THAT:

1.    The respondent’s interlocutory application dated 17 June 2014 be adjourned for further consideration to 19 September 2014 at 2.15 pm.

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

REASONS FOR JUDGMENT

introduction

1    This is an application by the respondent for security for costs. The respondent relies on the powers given to this Court to make such an order in s 56 of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”) (see also r 19.01 of the Federal Court Rules 2011 (Cth)) and s 1335(1) of the Corporations Act 2001 (Cth) (“Corporations Act”) respectively.

2    The applicant opposes the application and it contends that there is no reason to believe that it will not be able to meet an order for costs in favour of the respondent if it is unsuccessful in its claim.

3    The respondent has issued a cross-claim against the applicant. However, in the course of submissions on the application for security for costs, the respondent gave an undertaking that it will not prosecute the cross-claim should the applicant’s proceeding against it be either stayed or ultimately dismissed for a failure to provide security for costs.

4    The respondent put forward evidence in support of its estimate of its costs of the proceeding of $526,260. The estimate of the respondent’s costs to the end of the first day of trial was in the order of approximately $420,000. The applicant has not put forward any evidence which challenges the respondent’s estimate of its costs.

the APPLICANT’S CLAIM AND THE RESPONDENT’S CROSS-CLAIM

5    The applicant carries on business in the field of environmental engineering. It alleges that, on 23 November 2012, it entered into a contract in writing with the respondent whereby it agreed to fabricate, supply, and deliver glass reinforced pipeline (“GRP”), interconnecting spools and site jointing for Condabri Central and Ready Creek in relation to APLNG-Water Treatment (“the Contract”). The Contract was entitled a “Works Contract” for “Fabrication, Supply and Delivery of GRP Interconnecting Pipe Spools and Site Jointing for Condabri Central and Ready Creek” in relation to “APLNG-Water Treatment Facilities”. The respondent’s case is that the Contract was executed on 25 February 2013. I will refer to the works under the Contract as the “GRP works”.

6    The applicant’s case is that, prior to the Contract, authorised agents of the respondent engaged in conduct in connection with the applicant’s tender for the GRP works which had the consequence that the applicant reduced its tender price for the works. It claims that it was misled as to the true scope of the GRP works, and that the respondent’s conduct was misleading or deceptive within the Australian Consumer Law (Competition and Consumer Act 2010 (Cth) Sch 2).

7    In addition, the applicant’s case is that the respondent’s authorised agents engaged in what the applicant identifies as “the further conduct” shortly after the Contract had been executed. The effect of that further conduct was to lead the applicant to believe that the scope of the works and, in particular, the time for the completion of those works, had changed, as had the costing structure. That belief caused the applicant to act in a particular way, including entering into a subcontract arrangement with an entity called RPC Technologies Pty Ltd (“RPC”). RPC was to undertake portion of the manufacturing of the GRP in Indonesia and Australia.

8    The applicant’s case is that, in March 2013, the respondent’s authorised agents engaged in what the applicant identifies as “the further additional conduct” in the form of assurances that the respondent would pay the applicant for variations and accelerated works.

9    The applicant also alleges that the further conduct and the additional further conduct by the respondent was misleading or deceptive.

10    The applicant alleges that, in May 2013, the respondent:

(1)    wrongly bypassed the applicant while the Contract remained on foot and dealt directly with RPC. It alleges that the respondent wrongfully induced RPC to breach its contractual arrangements with the applicant; and

(2)    wrongfully terminated the Contract for “convenience”. The applicant alleges that the termination contravened an obligation of good faith or cooperation, or an implied term of the Contract, or both.

11    The applicant also alleges that the respondent’s conduct, further conduct, and additional further conduct, was unconscionable contrary to ss 21 and 22 of the Australian Consumer Law. The applicant also alleges that a promissory estoppel arose. It is not necessary to set out the details.

12    The applicant claims that the respondent has not paid it all the amounts due to it under the Contract. It claims an amount of $3,156,000 plus GST. It also claims damages and other forms of relief.

13    The description of the applicant’s claim set out above is sufficient for present purposes. The respondent does not allege that the applicant’s claim is not bona fide or that it does not raise issues fit to go to trial.

14    The respondent’s cross-claim involves a number of allegations against the applicant. First, the respondent claims that, in performing the works under the Contract, the applicant failed to deliver GRP spools which complied with the drawings under the Contract, thereby causing loss to the respondent. Secondly, it claims for the recovery of an overpayment allegedly made by it to the applicant. Finally, it claims that it suffered loss and damage flowing from the late delivery of the GRP spools by the applicant under the Contract and the applicant’s premature demobilisation from the site. The total amount claimed by the respondent in its cross-claim is $1,491,425.27.

The financial position of the applicant

15    The applicant was registered as a company on 19 March 1999. Its registered office is care of a company carrying on business as chartered accountants under the name “Sims Richmond”. Mr Charles Figallo is the sole director of the company. He is also the secretary of the company. The applicant has issued 10,100 $1 ordinary shares, of which $200 is paid up. All of the company’s shares are held by Renior Pty Ltd (“Renior”). Renior does not hold the shares in the applicant beneficially. The beneficial owner of the shares in the applicant has not been disclosed by the applicant. The applicant has granted a number of charges to third parties. There are fixed and floating charges in favour of the Australia and New Zealand Banking Group Limited and the Westpac Banking Corporation respectively. There are fixed charges in favour of two third parties. There are several motor vehicle charges and other goods charges in favour of various third parties. The applicant does not own any real property in South Australia.

16    The legal owner of the shares in the applicant, Renior, was registered on 20 June 1989. Its registered office is also at the address of Sims Richmond. Mr Charles Figallo is the sole director of the company. He is also the secretary of the company. The company has issued two $1 shares. They are both held by Mr Charles Figallo. The company has granted fixed and floating charges in favour of the Australia and New Zealand Banking Group Limited and the Westpac Banking Corporation respectively. It has issued three “all present and after-acquired property – with exceptions” charges in favour of the Westpac Banking Corporation. The company owns three properties in South Australia, and each of those properties is subject to a registered mortgage in favour of the Westpac Banking Corporation.

17    Mr Michael Michaels is a director and the principal of Sims Richmond. That company has acted as accountants for the applicant since its incorporation. On 23 May 2014, Mr Michaels prepared a statement in which he expressed certain opinions as to the financial position of the applicant. He expresses the opinion that the business of the applicant is in a very strong and sound financial position. He expresses the opinion that the applicant has sufficient financial capacity to satisfy any adverse order for costs in this proceeding. He expresses the opinion that the company has sufficient liquid assets and he states that, as at 30 April 2014, the company had in excess of $1.6 million in cash. He states that the company had a history of profitable trading and was adequately capitalised. He attaches to his statement a balance sheet for the applicant as at 30 June 2013 (“the 2013 balance sheet”). This balance sheet shows that the applicant had net assets of $7,609,831 as at 30 June 2013. Current assets totalled $11,517,080, comprised of cash and cash equivalents of $5,497,426, trade and other receivables of $6,012,189, and other current assets of $7,465. Current liabilities totalling $4,119,946 comprised trade and other payables of $1,091,810, tax liabilities of $3,009,277, and borrowings of $18,859. Non-current assets totalled $302,588, and non-current liabilities totalled $89,891. Mr Michaels also states that the company’s turnover for the year ended 30 June 2013 was $19,211,113. Mr Michaels states that his assessment had been conducted on the basis of unaudited financial information and, therefore, Sims Richmond does not accept any liability for any loss or damage which any person may suffer arising from its advice.

18    In his affidavit, Mr Michaels states that the information in the 2013 balance sheet is, to the best of his knowledge, information and belief, accurate and reliable.

19    Mr Michaels states that the applicant operates on the basis of a cash surplus. He produces a bank statement for a business overdraft account in the name of the applicant. The bank statement is heavily redacted. It shows that, as at 2 July 2013, there was $4,952,095.54 in the account. Similar bank statements for the account were produced for 27 May 2014 (showing a balance of $1,884,797.61) and 1 July 2014 (showing a balance of $1,528,990.49).

20    Mr Michaels states that he was unable to provide a balance sheet for 30 June 2014 as the accounts for that financial year had not been concluded at the time by his firm. He states that the “2014 financials” are yet to be prepared. They are due, in the ordinary course, to be completed in October 2014.

21    Mr Michaels states that there have been no substantial material changes in the financial year ending 30 June 2014, and that he would be aware if there had been any such changes.

22    Mr Michaels states that a number of “historical” charges remain registered against the applicant. He states that four of the charges referred to by the respondent have been paid out, and that he has advised the applicant’s staff of the procedure for discharging these charges, and that the applicant is in the process of doing so.

23    Mr Michaels expresses the opinion that the applicant is in a strong financial position. Mr Michaels believes that he would be in a position to reasonably satisfy external accountants on a confidential basis of the accuracy of the 2013 balance sheet. Furthermore, he considers that he will be able to satisfy any reasonable inquiry from external accountants “as to the fact that the 2014 financial position is no less favourable than the position as at 30 June 2013”.

24    It is convenient at this point to refer to offers made by the respective parties with respect to the applicant providing the respondent with further financial information. By letter dated 28 May 2014, the respondent’s solicitors wrote to the applicant’s solicitors asking that the applicant provide the following information:

(a)    relevant and current bank statements indicating cash available for the past 6 months up to today’s date (we are content for Basetec to mask individual transactions, provided our client is able to examine the running balance in the accounts);

(b)    copies of Basetec’s aged accounts receivable and accounts payable registers for the past 6 months up to today’s date;

(c)    profit and loss, and cashflow, statements for the years ended 2012, 2013 and the most recent statements available for the current financial year (including an explanation for significant differences in these statements between financial years);

(d)    a breakdown and update of the current assets as at today’s date (noting that the information provided previously is at 30 June 2013 and not broken down);

(e)    updated details of all current and non-current liabilities (including amounts outstanding to the registered security holders identified in our letter dated 15 May 2014);

(f)    any statutory financial statements prepared by Basetec for the last 3 financial years (to the extent that Basetec is required to prepare such statements);

(g)    details of all dividend payments made since 30 June 2013; and

(h)    details of unencumbered assets available to Basetec.

25    The respondent proposed a regime whereby the information would be provided only to its “in-house” counsel and its external legal advisers, and those persons would give confidentiality undertakings. For its part, the applicant proposed a regime whereby external accountants nominated by the respondent would liaise with the applicant’s external accountants (Sims Richmond) “on a strictly confidential basis” to satisfy themselves as to the accuracy of the financial information.

26    Mr Michaels addresses the respondent’s request for information and expresses the view that some of the information as to customers, supplies and profit margins would be highly sensitive and valuable within the commercial market. By way of example, he expresses the opinion that profit margins would be highly valuable if disclosed to potential customers and competitors, and at the same time, such disclosure would be highly damaging to the applicant.

27    Mr Michaels states that he raised his concerns about the information sought by the respondent with Mr Charles Figallo, who he describes as the managing director of the applicant, Mr Tan, who he describes as the applicant’s internal accountant, and Ms Forsyth, who he describes as the solicitor for the applicant. Mr Michaels was given instructions by Mr Charles Figallo that, whilst he was prepared to provide unrestricted “account” information to a judge of the Federal Court and, separately, information to the respondent’s accountants provided that it was on a strictly confidential basis, “the nature of the building industry was such that the information had the potential to damage Basetec at the same time benefit Leighton”.

28    Mr Paul Figallo is the general manager of the applicant. He states that the applicant is the sole operating entity of a business which specialises in engineering, principally GRP. He describes the applicant as a specialist contractor in a niche industry, and he states that, over the past 15 years, the applicant has established a substantial reputation and expertise in the field of GRP.

29    Mr Paul Figallo states that dividends paid by the applicant are modest. He states that cash equivalents referred to in the 2013 balance sheet consist principally of retentions and deposits. The applicant operates a cash positive business, borrowing only for vehicles and similar capital items. The cash, although substantial, is fully utilised for the applicant’s operations.

30    The applicant holds a licence as a building work contractor under the Building Work Contractors Act 1995 (SA).

31    Mr Paul Figallo states that the applicant would be in a position to pay costs to the respondent of $526,260 (the amount claimed in the respondent’s interlocutory application) in the event that the applicant’s claim was unsuccessful. However, he also states that, if the applicant was required to set aside an amount of $526,260 prior to and without the result of a trial, then it would need to curtail some of its business activities. He explains what he means by this statement in the following paragraphs of his affidavit:

14.    The Basetec business model is that it operates on a cash surplus basis and it uses this cash actively to work and improve the business. In colloquial terms there is no lazy money.

15.    The importance of working capital is common to the building industry and would be well known to Leighton. Basetec, like any other engineer or builder, would be required to restructure its operations to provision for an amount of $526,000 either as cash or security. It would likely pass over some business opportunities. Such restructure would also likely affect employment. Cost-cutting has the potential to cause redundancies to cover the cost of the cash or security provisioned.

32    Mr Paul Figallo states that the respondent would necessarily be familiar with the size of the applicant’s operations in the industry and that large contractors, such as the respondent, consider competence, capacity, and solvency before engaging contractors such as the applicant. He describes the respondent’s engagement of the applicant in respect of two separate projects.

33    Mr Paul Figallo describes his concern that sensitive and confidential commercial information, if released to the respondent, would find its way into the market place. He identifies the most sensitive commercial information available in the building industry as profit margins, particularly profit margins per job, names of suppliers, particularly costs of supplies, and names of clients, particularly the size of individual contracts. He refers to the information requested by the respondent’s solicitors. He identifies documents which are sensitive because they would disclose the names of the clients, the names of suppliers, profit margins per job and fixed and variable expenses, and the identity of lenders and suppliers. He refers to the applicant’s offer that information be exchanged on a confidential basis between Sims Richmond and external accountants appointed by the respondent.

The relevant principles

34    Section 1335(1) of the Corporations Act is in the following terms:

(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.

35    Section 56(1) of the Federal Court Act is 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 under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her.

36    There are two major elements in s 1335(1) of the Corporations Act. The first element is that it must appear by credible testimony that there is reason to believe that the plaintiff corporation will be unable to pay the costs of the defendant if the defendant is successful in his, her or its defence. Assuming the first element is established, the second element is that the Court must exercise a discretion as to whether it will order security for costs. The discretion has been referred to as unfettered, although there are clearly a list of matters that are routinely considered.

37    By contrast to s 1335(1) of the Corporations Act, s 56(1) of the Federal Court Act is expressed in terms of a general discretion.

38    In this case, the respondent put its application for security for costs on the basis that it appears by credible testimony that there is reason to believe that the applicant corporation will be unable to pay the respondent’s costs if the respondent is successful in its defence and that the relevant discretionary matters favour an order for security for costs. In the circumstances of this case, there is no practical difference between the operation of s 1335(1) of the Corporations Act and the operation of s 56(1) of the Federal Court Act (see Soul Pattinson Telecommunications Pty Ltd v Subex Americas Inc [2009] FCA 651, at [6]; Health Information Pharmacy Franchising Pty Ltd v Khoo [2010] FCA 438, at [5] (“Health Information Pharmacy Franchising v Khoo”).

39    In Beach Petroleum NL and Another v Johnson and Others (1992) 7 ACSR 203 (“Beach Petroleum NL v Johnson”), von Doussa J considered the requirements in s 1335(1) of the Corporations Act. His Honour said (at 205):

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 taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security.

40    The decision in Beach Petroleum NL v Johnson is often cited on applications for security for costs, but his Honour’s approach has also been criticised on the ground that it adds a gloss to the words of the section: Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 (“Livingspring v Kliger”), at [15] (see also Smart Company Pty Ltd v Clipsal Australia Pty Ltd [2009] FCA 1253, at [42]-[43] per Lander J).

41    I am not convinced that his Honour did add a gloss to the words of s 1335(1) of the Corporations Act, but it is unnecessary to examine that question in this case.

42    I turn now to identify additional principles which are relevant.

43    In Beach Petroleum NL v Johnson, von Doussa J said (at 204) that s 1335(1) of the Corporations Act did not require that the Court be satisfied, as a matter of probability, that every eventuality which could lead to eventual payment of the costs be excluded. In Livingspring v Kliger, the Court of Appeal of Victoria described the first element in s 1335(1) of the Corporations Act as a low threshold. The Court said (at [16], footnotes omitted):

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.

44    In Beach Petroleum NL v Johnson, von Doussa J said (at 205, citations omitted):

A corporation “will be unable to pay” the costs within the meaning of the section if it can only do so if given extended time to realise assets which might be difficult to realise, at least at a price sufficient to provide a surplus over other liabilities, sufficient to pay the costs.

45    Finally, in Livingspring v Kliger, the Court of Appeal said (at [21]) that the onus of establishing the elements in the section remained throughout on the defendant. In other words, it does not shift to the plaintiff corporation once the defendant has established the first element in s 1335(1) of the Corporations Act.

46    The matters relevant to the second element of s 1335(1) of the Corporations Act have been identified in the authorities as including the degree of likelihood of the plaintiff corporation being unable to pay the costs (Beach Petroleum NL v Johnson, at 205), the strength and the bona fides of the applicant’s claim, the cause of the respondent’s impecuniosity, whether an order for security will otherwise stifle a genuine claim, whether there are persons standing behind the company and whether they are prepared to provide an undertaking to meet an adverse costs order, whether there has been delay by the respondent in making the application, and whether there are any public interest considerations (Health Information Pharmacy Franchising v Khoo).

Issues on the application

47    The evidence satisfies me that, at the present time, the applicant could provide security in the amount sought by the respondent. In other words, it could meet an adverse costs order if required to do so immediately. However, the test under s 1335(1) requires the Court to assess what the position is likely to be should the applicant’s claim fail. That requires the Court to reach a view as to a particular timeframe in which an adverse costs order might be made, and then to predict if the company will be unable to meet an adverse costs order at that time. In this case, I think it is appropriate to select a period of one year and to proceed on the basis that, if an adverse costs order is made, it is likely to be made in about one year’s time. It is important to remember that it is not necessary for a respondent to exclude, as a matter of probability, every eventuality which could lead to payment of an adverse costs order by an applicant.

48    The respondent relies on two matters in support of its contention that there is reason to believe that the applicant will be unable to pay its costs in the event that the applicant is unsuccessful. First, it points to the fact that the applicant’s business is a cash business, in the sense I have described, and is vulnerable to fluctuating circumstances. Secondly, it points to the information that the applicant must have but which it has not disclosed.

49    In my opinion, there is reason to believe that the applicant will be unable to pay costs if its claim is unsuccessful. The 2013 balance sheet is relevant financial information, but it is not the most up-to-date financial information. I have the redacted bank statements, but they show, without any explanation, a balance in the account reducing from $4,952,095.54 (2 July 2013) to $1,884,797.61 (27 May 2014) to $1,528,990.49 (1 July 2014). I have Mr Michaels’ assertions that there have been no major changes from the 2013 balance sheet, but his precise involvement, and why he says he would know that, is left unexplained. There is no evidence from Mr Charles Figallo or Mr Tan, and there has been no effort to produce management accounts or equivalent financial information. The way the company operates is that the cashflow in is highly significant and there is no “lazy money”. A significant fluctuation in cashflow will mean that the company will be unable to meet a substantial liability in a timely fashion. Although the absence of information from the applicant cannot of itself discharge the respondent’s onus, it is relevant where the evidence otherwise points in a particular direction. Whilst I accept that some of the information sought by the respondent would be commercially sensitive from the applicant’s point of view, I do not accept that the applicant could not provide, by means of redaction or prudent selection, sufficient information to satisfy the Court of its present financial position.

50    As far as the discretion is concerned, three matters can be identified as neutral. First, the respondent does not suggest that the applicant’s claim is not bona fide or that it does not raise issues fit to go to trial. On the other hand, it is not possible for me to form any view at this stage about the likely strength of the applicant’s claim. Secondly, the applicant does not suggest that the respondent has delayed in bringing this application for security for costs. Thirdly, neither party identified an aspect of public interest which bore upon the question of whether or not an order for security for costs should be made.

51    The respondent placed a good deal of emphasis on the fact that the applicant had not identified the person who was the beneficial owner of the shares in the applicant. The question of the identity of the person or persons standing behind the plaintiff corporation and whether they are prepared to give an undertaking to meet any adverse order as to costs usually arises in a context where the plaintiff corporation contends that an order for security for costs will stifle its claim (Health Information Pharmacy Franchising v Khoo, at [62]-[63] per Yates J). That is not this case because the applicant does not contend that an order for security for costs will stifle its claim. However, the applicant does submit that an order for security for costs will adversely affect the future conduct of its business and it asks me to take that into account. By parity of reasoning with a case where an applicant claims an order for security will stifle its claim, I would not be disposed to put any real weight on that allegation in light of the applicant’s failure to disclose the identity of the beneficial owner of its shares. It follows from what I have said that, other than the matter which enlivens the Court’s jurisdiction under s 1335(1) of the Corporations Act, the discretionary factors are relatively neutral. The matter which engages the power is relevant on the discretion (Beach Petroleum NL v Johnson, at 205; Ariss and Another v Express Interiors Pty Ltd (in liquidation) [1996] 2 VR 507, at 514), and I think that there is sufficient likelihood of the applicant being unable to meet an adverse order as to costs to warrant an exercise of the power in favour of ordering security.

52    As far as quantum of security is concerned, the amount claimed in the application is $526,260. The respondent’s principal solicitor provided an estimate of the respondent’s costs. There was also an estimate from an independent solicitor who specialises in the assessment of costs. His estimate of the likely costs to be incurred by the respondent to the completion of the proceedings is $526,260. I was informed during the course of submissions that the estimate to the end of the first day of trial is in the order of approximately $420,000.

53    I think that there are a number of variables in this case and the amount sought by the respondent is very significant. The variables I have in mind are the fact that, as the proceeding develops, a clearer picture of the apparent merits of the claim and cross-claim may emerge, and a clearer picture of the costs likely to be incurred may emerge. Based on the evidence before me, my estimate of the respondent’s costs to a point where the proceeding is likely to be ready to be set down for trial is approximately $300,000. I will order that the applicant provide security in that amount.

conclusion

54    The applicant should provide security for costs in the amount of $300,000. Neither party made submissions about the form of security and I will give the parties the opportunity to agree that matter. I will relist the application in seven days’ time for the making of orders if the matter has been agreed or for the determination of the form of security if there has been no agreement.

Associate:    

Dated:    12 September 2014