Central Queensland Mining Supplies Pty Ltd v Columbia Steel Casting Co [2010] QSC 402

SUPREME COURT OF QUEENSLAND CITATION: Central Queensland Mining Supplies Pty Ltd v Columbia Steel Casting Co [2010] QSC 402 PARTIES: CENTRAL QUEENSLAND MINING SUPPLIES PTY LIMITED ACN 010 402 990 (plaintiff) v COLUMBIA STEEL CASTING CO (respondent) FILE NO/S: BS 1777 of 2010 DIVISION: Trial Division PROCEEDING: Application for security for costs ORIGINATING COURT: Supreme Court, Brisbane DELIVERED EX TEMPORE ON: 12 October 2010 DELIVERED AT: Brisbane HEARING DATE: 12 October 2010 JUDGE: Margaret Wilson J ORDER: 1. The plaintiff provide security for the defendant’s costs of disclosure and the taking of witness statements in the sum of $100,000; 2. Such security be given by way of bank guarantee in a form that is satisfactory to the Registrar of the court; 3. The security be provided by the plaintiff within 14 days; and 4. The plaintiff pay the defendant’s costs of and incidental to the application to be assessed on the standard basis unless otherwise agreed. CATCHWORDS: PROCEDURE – COSTS – security for costs – where the plaintiff commenced proceedings in February 2010 against defendant – where disclosure likely to be expensive – where defendant applied for security for costs – where costs of disclosure and taking witness statements estimated at more than $150,000 by defendant – where plaintiff’s immediate parent company ("Holdings") proffered undertaking – where Holdings' liabilities exceeded its assets – where Holdings' audited financial statements for 2008-2009 financial year provided – where Holdings' audited financial statements for 2009-2010 financial year not provided – where plaintiff refused to provide statement of Holdings' net asset position – -- 1 of 10 -- 2 whether applicant defendant provided cogent evidence of reasonable possibility that plaintiff would be unable to meet the costs if judgment went against it – whether court should exercise its discretion to grant security for costs in the circumstances Corporations Act 2001 (Cth), ss 1305, 1335(1) Uniform Civil Procedure Rules 1999 (Qld), r 671(a) Beach Petroleum NL v Johnson (1992) 7 ACSR 203 Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 COUNSEL: N Ferrett for the defendant/applicant D de Jersey for the plaintiff/respondent SOLICITORS: HopgoodGanim Lawyers for the defendant/applicant Clayton Utz for the plaintiff/respondent HER HONOUR: This proceeding has been entered on the Commercial List. The defendant seeks an order for security for costs. The proceeding was commenced on 20 February 2010 by the filing of a claim and statement of claim. On 12 May 2010 the defendant filed a notice of intention to defend and defence. The plaintiff filed an amended statement of claim on 27 July 2010. The application for security for costs was filed on 8 September 2010. The security sought is security for the costs of disclosure and taking witness statements. The plaintiff's claim is for damages for breach of a distribution agreement in the sum of $26,260,000. The defendant is based in Oregon in the United States. It is a manufacturer of heavy equipment including dragline chains -- 2 of 10 -- 3 and rigging. The plaintiff was the defendant's exclusive distributor in Australia for about 23 years from 1986 to 2009. The distributorship agreement was never recorded in writing. It was terminated by the defendant last year. After the arrangement was terminated the plaintiff commenced this proceeding. It claims that as a matter of implication in the distribution agreement it was entitled to three years' notice of termination. It claims loss of the profit it would have earned from the business during that period. The defendant asserts that no notice was necessary, but that in any event immediate termination was justified. The plaintiff also contends that the defendant's conduct in extending favourable terms of credit evolved by effluxion of time into an obligation not to withdraw those favourable terms without sufficient notice. In an affidavit filed on 4 August 2010 explaining delay in filing the amended statement of claim, Ms Simone Mitchell, a solicitor in the employ of Clayton Utz Sydney, solicitors for the plaintiff, said that because of the sheer number of documents to be reviewed Ernst & Young had been engaged to identify, preserve and process electronic information held by the plaintiff in relation to the defendant. As a result 311.9 gigabytes of data had been identified, including emails, loose documents and forensic images. Between 74 and 743 days were estimated to be needed to review all of that data. In consequence, instructions had been given to Ernst & Young to limit the review process, including deduplicating data, limiting the custodians of documents and the number of -- 3 of 10 -- 4 key word searches. I mention this because it is some indication that mutual disclosure is likely to be a very substantial and very expensive exercise. In an affidavit filed on 8 September 2010 Mr Liam Prescott, a solicitor of Hopgood & Ganim Lawyers, the solicitors for the defendant, said that the defendant had incurred costs to date of $17,715.18 for solicitors' fees and $5,600 for counsel's fees. He estimated that the costs of disclosure and taking witness statements would come to in excess of $150,000. His estimate was described as a "high level estimate". Counsel informed me that that meant it did not descend into fine detail. Security for costs may be awarded against a company either pursuant to rule 671(a) of the UCPR or section 1335(1) of the Corporations Act. The latter is perhaps less stringent in what it requires. In any event, there are two stages to such an application. One, there is a threshold hurdle to be overcome: the applicant must establish by credible testimony there is reason to believe the plaintiff company would be unable to pay the defendant's costs if the defendant succeeded in its defence and; two, there is the question of how the Court should exercise its discretion in those circumstances. On the threshold hurdle, it is for the applicant to show it is reasonably possible the plaintiff would be unable to meet -- 4 of 10 -- 5 the costs if judgment went against it. It needs to show that by evidence of some cogency. Mere speculation would not be enough. I refer to Beach Petroleum NL v. Johnson (1992) 7 ACSR 203 at 205 and Warren Mitchell Pty Ltd v. Australian Maritime Officers Union (1993) 12 ACSR 1 at 5. Has the threshold hurdle been overcome in this case? It is clear that the plaintiff's liabilities substantially exceed its assets. As at 30 June 2009 the deficit was about $5.5 million. According to the plaintiff's auditors the main cause of that deficiency is a liability owing by the plaintiff to its "immediate parent entity" CQMS Holdings Pty Ltd of $23,047,946. I shall refer to that company as "Holdings". Holdings, as the parent, has undertaken to the plaintiff not to call on that balance for a period of 12 months from when the financial statements were signed, that is 12 months from 17 June 2010. The defendant applicant bears the ultimate persuasive onus on both the threshold question and that of a favourable exercise of discretion. There is nevertheless a shifting evidentiary onus. The defendant has shown that the plaintiff's liabilities exceed its assets. The evidentiary onus then shifted to the plaintiff, and the plaintiff relied on an undertaking proffered to the Court by Holdings in these terms: an irrevocable undertaking that should the plaintiff have insufficient funds to meet any costs order made against it in favour of the defendant in the proceeding it, Holdings, would pay that costs order. I -- 5 of 10 -- 6 note that the undertaking was originally proffered to the defendant rather than to the Court. At the hearing, however, it was proffered also to the Court. The material establishes that as at 30 June 2009 Holdings had net assets of $19,466,055 and that it made a net profit for the year ended 30 June 2009 of $1,782,809. That material is contained in audited financial statements which were signed by the directors on 17 June 2010. In the directors' report appended to the statements there is reference to this litigation and also to Holdings having on 18 May 2010 acquired plant and equipment, inventory and the operations of a foundry called Hendriks Manufacturing Limited for US$1,040,810, partly funded by a further capital injection by one of its shareholders of A$1 million. The directors' report went on as follows: "Apart from the abovementioned, no matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the company, the results of those operations, or the state of affairs of the economic entity in future financial years. Likely developments in the operations of the company and the expected results of those operations in future financial years have not been included in this report as the inclusion of such information is likely to result in unreasonable prejudice to the economic entity." Later in the notes to the reports it was recorded that as at the date of the signing of the report the directors were not -- 6 of 10 -- 7 aware of any events which materially affected the numbers presented in the report, that the financial statements and notes gave a true and fair view of the company's financial position and changes in equity, and that in the directors' opinion there were reasonable grounds to believe the company would be able to pay its debts as and when they became due and payable. The only material relating to the period beyond 30 June 2009 is what I have quoted above. Those two sentences are, in my view, rather qualified, particularly in that they expressly say that "likely developments in the operations of the company and the expected results of those operations have not been included in the report". I note also that those financial statements were signed on 17 June 2010, which is almost four months ago. The accounts for the year ended 30 June 2010 of the plaintiff and of Holdings have not been finalised. It seems that draft unaudited accounts have been prepared. Indeed, they were referred to in an affidavit of Courtney Emily Booth filed on 23 September 2010 as a confidential exhibit. That exhibit has not been filed in the Court and copies have not been made available to the applicant. There were negotiations between the parties with a view to restricting access to the draft accounts to the defendant's legal representatives and representatives of the defendant, but agreement was not reached. -- 7 of 10 -- 8 Then the defendant sought an affidavit by an authorised officer of Holdings as to the net asset position of Holdings. That was refused by the plaintiff. It was refused, it seems, on three grounds: (a) that it would not add to what is in the financial reports already before the Court; (b) that the directors would be dependent on a report of the auditors in expressing an opinion as to net assets; and (c) that there is no obligation to provide direct evidence on an interlocutory application. For the reasons I have already given, I do not accept that this would not add to what is in the financial reports. These are volatile economic times. The statements are three and a half months old and what is in the reports is qualified, as I have said, with respect to the future. Secondly, the auditor's role is surely to check the validity and reliability of information provided to them rather than to value assets. Counsel referred to section 1305 of the Corporations Act about books being admissible in evidence as prima facie evidence of their contents and he pointed out that under the legislation "book" includes financial reports or records. It is not clear to me that the directors' report would be included in books in this definition but, even if it is, it is, as I have said, qualified. In short, what is before the Court is not sufficient to satisfy me that the undertaking proffered today is one of substance. So, the position is that the plaintiff's liabilities exceed its assets; the holding company proffers -- 8 of 10 -- 9 an undertaking that has not been shown to be one of substance. In my view the threshold test has been met by the applicant/defendant. I turn then to the discretion which the Court has in the circumstances, whether to order security and if so, in what amount and in what form. That there is a real possibility the plaintiff would be unable to meet a costs order is relevant to the exercise of the discretion. So is the nature of the litigation and the prospect of its being expensive litigation. It will involve an examination of the relationship between the parties over 23 years. The defendant is based in Oregon, and statements will have to be taken from witnesses there. As I have already pointed out, disclosure is likely to be a very costly exercise. In my view there should be an order for security for costs of disclosure and the taking of statements. I am uneasy about the estimate of $150,000 which has been given. It does not descend into much particularity. Further, it seems to me there are some anticipated items of expenditure, such as two lawyers going to the United States to gather evidence, which may well be agreed between the defendant and its solicitors and be proper between them, but which, at this stage anyway, ought not be visited upon the plaintiff. -- 9 of 10 -- 10 In all the circumstances, I am going to make an order for security for costs to cover disclosure and taking witness statements. Security will be ordered to the extent of $100,000. It should be provided by way of a bank guarantee in a form satisfactory to the Registrar within 14 days. -- 10 of 10 --