Stern Electronics Pty Ltd v Vascular Enhancement Technology Pty Ltd
[2009] QDC 284
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- Unreported Judgment
- Stern Electronics Pty Ltd v Vascular Enhancement Technology Pty Ltd[2009] QDC 284
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Stern Electronics Pty Ltd v Vascular Enhancement Technology Pty Ltd[2009] QDC 284
Stern Electronics Pty Ltd v Vascular Enhancement Technology Pty Ltd[2009] QDC 284
DISTRICT COURT OF QUEENSLAND
CITATION: | Stern Electronics Pty Ltd v Vascular Enhancement Technology Pty Ltd [2009] QDC 284 |
PARTIES: | STERN ELECTRONICS PTY LTD (ACN 010 695 360) (plaintiff/respondent) AND ACN 114 927 098 PTY LTD (Formerly known as Vascular Enhancement Technology Pty Ltd) (defendant/applicant) |
FILE NO/S: | 3189 of 2008 |
DIVISION: | Civil |
PROCEEDING: | Application for security for costs |
ORIGINATING COURT: | Brisbane |
DELIVERED ON: | 27 August 2009 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 28 April 2009 and 24 August 2009 |
JUDGE: | Kingham DCJ |
ORDER: |
|
CATCHWORDS: | PROCEDURE – COSTS – SECURITY FOR COSTS – corporate plaintiff without means – application for security for costs – whether discretionary factors favoured order – amount of security to be provided Uniform Civil Procedure Rules 1999 (Qld), r 671, r 671(a), r 672 (b), r 672(e), r 672(h) Combined Property Industries (Qld) Pty Ltd v Pullenvale Estates Pty Ltd [2001] QSC 73, cited Famel Pty Ltd v Burswood Management Ltd (1989) 15 ACLR 579, followed Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523, applied Togito Pty Ltd v Pioneer Investments (Aust) Pty Ltd [2009] QSC 68, followed |
COUNSEL: | F Redmond for the plaintiff/respondent C Johnstone for the defendant/applicant |
SOLICITORS: | Rostron Carlyle for the plaintiff/respondent Bennett & Philp for the defendant/applicant |
- [1]Stern Electronics claims the defendant owes it is $55,963.76 in consultancy fees and interest for services provided by its director, Walter Meyer in developing a deep vein thrombosis protection device (DVT device). The defendant denies the claim and seeks an order for security for costs because there is reason to believe Stern Electronics will not be able to pay the defendant’s costs if ordered to do so.[1] The defendant’s application is opposed by Stern Electronics.
- [2]Stern Electronics is a “$2 company”. Mr Meyer is its director but is not a shareholder. Its sole asset is its shareholding in the defendant, an option it took up during the consultancy relationship. Mr Meyer’s stated Stern Electronics earns ad hoc consultancy fees of $40,000 per year, presumably through Mr Meyer’s work for other clients. Stern Electronics has not put in evidence any financial statements and it is not clear what its net income is.
- [3]Evidence led by the defendant about the value of Stern Electronics’ shares was not seriously challenged. Mr Bennett, a director of the defendant, deposed to current liabilities exceeding $250,000. Because they are loans from shareholders and directors, not including Stern Electronics or Mr Meyer, those liabilities are growing as interest compounds. The defendant has cash assets of $40,000 and a contingent right to a fee of $500,000 for its assignment of intellectual property rights in the DVT device to New Tec Pty Ltd. That fee is payable once New Tec has earned gross income of $5 million from sales of the DVT device. It is not yet marketable. According to Mr Bennett, the product will take another year in development and some 3 to 5 years on the market before that threshold is likely to be reached.
- [4]Mr Philp, the defendant’s solicitor, has estimated the costs of the action are likely to be in the order of $118,000. At first blush that figure appears excessive when compared with the amount claimed by Stern Electronics. Mr Philp took considerable time and trouble in setting out the assumptions upon which his estimate was based. Repeated requests Stern Electronics identify how the estimate was excessive were not responded to.
- [5]The litigation is complicated because the defence asserts false representations and a total failure of consideration and fundamental breach of contract. These defences rest on assertions about defects in the design work produced by Mr Meyer. His brief was to design, develop and create a saleable miniaturised model of a DVT device developed by Mr Bennett and another investor in the defendant company. The defendant asserts the plaintiff failed to comply with its obligations under the retainer agreement and the work undertaken, and in particular the proposed model Mr Meyer designed was defective in multiple respects. The false representations alleged relate to its expertise and ability to perform the work required under the agreement. There is also a counterclaim, but it only adds to the defence in seeking a declaration that it was entitled to terminate the contract.
- [6]The defence has obvious implications for the cost of the litigation. Disclosure by the plaintiff of its notes, drawings and draft workings is likely to be required. Mr Philp descended to estimate the volume of material involved and that was not challenged. Further, some involvement of experts would appear to be unavoidable. If the plaintiff is represented by Mr Meyer, as it has been at various stages of this litigation, the trial may take longer than it otherwise might.
- [7]While Mr Meyer represented Stern Electronics when the application first came on for hearing, it was adjourned to enable him to obtain advice and produce material in contest to that led by the defendant. When the hearing resumed, Stern Electronics was represented by experienced counsel for who described the costs estimate as extortionate. It is a matter of concern that the costs could so far exceed the claim. Yet, I cannot accept that submission. Perhaps Mr Philp’s estimate is generous in some respects but I am not in a position to properly assess that on this application and there is no alternative estimate from Stern Electronics before me.
- [8]Taking a conservative approach and halving the estimate, the conclusion that Stern Electronics is unlikely to be in a position to meet a costs order is still compelling.[2] The defendant does not have a current right to the $500,000 assignment fee. Even if it did, its secured liabilities are some $250,000. On that basis, Stern Electronics’ 16.7% shareholding in the defendant could not be much more than $41,000. I am satisfied the prerequisite for making an order for security for costs has been met.[3]
- [9]Counsel for Stern Electronics argued discretionary considerations did not favour making an order for costs. I have taken the following matters into account in deciding that an order should be made in the terms set out below.
- [10]Firstly, Stern Electronics’ prospect of succeeding in its claim is a relevant factor.[4] The bulk of the material filed by Stern Electronics is responsive to the defence and counterclaim. Putting aside the merits of the defence, Stern Electronics’ case is not properly pleaded or particularised, even in the material filed on this application. Mr Meyer deposed to a conversation in which he says it was agreed that he and other directors would be remunerated for their services at the rate of $200 per hour. As for the sum claimed; Stern Electronics has not outlined how the claim has been calculated and for what services. It has not descended to any specifics about his right to payment. Without more, Stern Electronics is not in a position to make out its claim.
- [11]Its counsel submitted its financial position was due to the defendant’s actions.[5] To deal with this submission it is necessary to canvass the relations between the two companies and their directors and shareholders. Stern Electronics became a shareholder in the defendant on 21 February 2008, when it exercised an option which formed part of the consulting agreement then in effect. Mr Meyer also became a director. Further shares in the defendant were later issued to other investors, a decision in which Mr Meyer participated. The effect was to reduce Stern Electronics’ shareholding from 20% to 16.7% of the defendant.
- [12]By March 2008 there were discussions between representatives of the two companies about progress in developing the DVT device. It is evident the defendant was concerned as shortly afterwards a third party was asked to report on the work to date. That report is the foundation for particulars of the defence allegation the design was defective. On 15 May 2008, the defendant directed Stern Electronics to stop work. In July 2008, Mr Meyer was removed as a director of the defendant and on 29 August 2008, the defendant gave Stern Electronics notice it considered the agreement was terminated.
- [13]On 26 September 2008 the defendant sought further funds from its shareholders to develop and commercialise the DVT device and gave notice of a meeting on 20 October 2008 to discuss the issue. Mr Meyer’s responses were equivocal and he was supplied with some financial information on 14 October 2008. By that time, the companies were in dispute about consultancy fees invoiced by Stern Electronics.
- [14]At its meeting on 20 October 2008 the defendant decided to explore alternative ways to raise capital. On 11 November 2008 the defendant proposed to its shareholders that the company sell the intellectual property in DVT device and negotiate the best possible terms of sale, in the context of Stern Electronics’ threat to commence proceedings against the defendant. Two days later Stern Electronics commenced these proceedings.
- [15]On 17 November 2008 the defendant approved a resolution to assign the intellectual property in the DVT device to a newly established company, New Tec. That company was intended to be the vehicle for raising the further capital needed to develop and commercialise the DVT device. Mr Meyer opposed the resolution. On 19 December 2008 the assignment took place. On the same day shares were issued to all existing shareholders in the defendant, except Stern Electronics. Later, in February 2009, shares were issued to a new investor in New Tec, who also took on the position of Director and Secretary.
- [16]Counsel for Stern Electronics characterised that transaction as uncommercial. The inference he invited me to draw is that the value of the shareholding was reduced by the assignment of its only asset for a contingent right. The assignment fee is the equivalent of a one-off payment of 10% of the first $5 million of gross revenue received by the assignee company. In the absence of further evidence, I am not persuaded that is an uncommercial arrangement. Whether it is so depends on the value of intellectual property at that point, necessarily a reflection of the stage then reached in developing and commercialising the DVT device and the further work, time and expense required to take it to market. There is insufficient evidence to allow me to make that assessment on this application. A contingent assignment fee linked to future revenue does not seem to me to be, of itself, a remarkable means to adopt in attracting capital to commercialise technology.
- [17]By November 2008 it was evident Stern Electronics did not wish to provide further funds to commercialise the DVT device. Assuming the assignment fee does represent the value of the defendant’s intellectual property; Stern Electronics’ interest is secured by its shareholding in the defendant. Stern Electronics has not claimed oppression as a minority shareholder, nor has it taken any steps to challenge the transaction between the defendant and New Tec. In my view, the circumstances in which the defendant assigned its intellectual property to New Tec do not count against the defendant’s application.
- [18]Counsel for Stern Electronics asked the court to take into account the defendant’s delay in bringing this application, but there does not appear to have been any significant delay.[6] As early as 17 February 2009, shortly after the reply was filed, the defendant’s lawyers raised the matter. A number of attempts were made to resolve the request for security. The application was filed on 20 April and came on for hearing on the 28th. The hearing was adjourned so Stern Electronics could obtain advice and contest the defendant’s evidence of the value of Stern Electronics’ shareholding. The further evidence on that point was not relied upon by counsel for Stern electronics. It was vague and unsatisfying material about a proposal by a person named Alan Lee Jones to acquire some of the plaintiff’s shares, which did not proceed. It did not advance Stern Electronics’ position.
- [19]Stern Electronics also argued the effect of an order for security of costs would be to stultify the action.[7] Although Mr Meyer is not a shareholder, he is a director of Stern Electronics and has offered to guarantee certain costs of the action. That offer was not relied upon as a reason to refuse the defendant’s application, no doubt because he is not a party who stands to gain by the litigation.[8] It would seem, though, that Mr Meyer may be both in a position and willing to support the proceedings.
- [20]In all the circumstances of the case, it is appropriate to order security be provided for costs but not to the extent sought by the defendant.[9] Whilst it is not intended to cast doubt upon Mr Philp’s estimate of costs, a moderate approach is called for. The order will require security in the sum of $40,000. An order is not an indemnity and not all costs need be secured.[10] The defendant has leave to apply on the first day of trial for further security.
- [21]During the adjournment, on 30 June 2009, Stern Electronics filed an affidavit by Mr Meyer which contains without prejudice communications arising from settlement discussions. It does not oppose an order that the affidavit is edited to delete the details of settlement discussions deposed to at paragraph 7 and to remove and destroy Exhibit WM-6.
- [22]My orders are:
- The plaintiff give security for the defendant’s costs of and incidental to these proceedings by way of an irrevocable bank guarantee provided by an Australian bank in favour of the Registrar of this honourable court in the sum of $40,000, such bank guarantee to be in terms acceptable to the Registrar.
- The defendant has leave to apply for further security on the first day of the trial of this action.
- The Registrar is directed to edit the affidavit of Mr Meyer filed on 30 June 2009 by deleting any reference to settlement discussions in paragraph 7 and by removing and destroying exhibit WM-6.
- [23]I will hear from the parties as to costs.
Footnotes
[1] Uniform Civil Procedure Rules 1999 (Qld), r 671.
[2] Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523.
[3] Uniform Civil Procedure Rules 1999 (Qld), r 671(a).
[4] Uniform Civil Procedure Rules 1999 (Qld), r 672 (b).
[5] Uniform Civil Procedure Rules 1999 (Qld), r 672(e)
[6] Combined Property Industries (Qld) Pty Ltd v Pullenvale Estates Pty Ltd [2001] QSC 73 per Mullins J.
[7]Uniform Civil Procedure Rules 1999 (Qld), r 672(h).
[8] Togito Pty Ltd v Pioneer Investments (Aust) Pty Ltd [2009] QSC 68 at [17].
[9] Harpur v Ariadne Australia Ltd (1984) 2 Qd R 523 at 529 per Connolly J.
[10] Famel Pty Ltd v Burswood Management Ltd (1989) 15 ACLR 579.