Wontok Enterprises Pty Ltd v Telstra Corporation Ltd

1. [1]

   In 2012 the plaintiff, Wontok Enterprises Pty Ltd, entered into an agreement with the defendant, Telstra Corporation Ltd, to license to Telstra antivirus and cyber-security software so that Telstra could provide that software to its customers for a fee.

2. [2]

   Telstra terminated the agreement with effect on 31 March 2021.

3. [3]

   Wontok claims that:

   1. (1)

      Telstra continued to let its customers use the software after March 2021;

   2. (2)

      Telstra did not, as it was required to do, advise Wontok that it should not provide ongoing support to those customers; and

   3. (3)

      Wontok, as it was obliged to do, continued to provide such support.

4. [4]

   Wontok claims that Telstra owes it some $3 million in relation to that support.

5. [5]

   Wontok commenced these proceedings in September 2021 seeking to recover that amount.

6. [6]

   The proceedings have reached a stage where Wontok has, very recently, served its evidence in chief, being an affidavit of its director, Mr Bruce Perry.

7. [7]

   Now, by Notice of Motion filed on 12 April 2022, Telstra seeks security for its costs of the proceedings in the sum of $595,000. Telstra first foreshadowed an application for security on 2 March 2022.

The threshold question – is there a reason to believe that Wontok will be unable to pay Telstra’s costs?

1. [8]

   The question is whether there is “reason to believe” that Wontok “will be” unable to meet an adverse costs order in the proceedings.

2. [9]

   Telstra must establish:

3. [10]

   In Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd, [2] Macfarlan JA explained: [3]

4. [11]

   On this application, close attention was paid by counsel to Wontok’s financial statements for the six month period to 31 December 2021. It is common ground that those financial statements reflect Wontok’s current financial position.

5. [12]

   Ms Williams, who appeared for Telstra, submitted that “little weight” should be given to Wontok’s financial statements.

6. [13]

   Ms Williams pointed to a statement which appears in the accounts under the heading “Compilation Report Statement”:

7. [14]

   However, on the preceding page of the accounts, under the heading “Directors’ Declaration”, it is stated that:

8. [15]

   Those statements were made on 8 February 2022, several weeks before Telstra foreshadowed seeking security for costs in the proceedings.

9. [16]

   Ms Williams also pointed to the fact that although Mr Perry had signed these statements in the accounts, he had not sworn an affidavit on this application and was thus not available to be cross-examined in relation to the accounts.

10. [17]

    These are factors to be taken into account, but they do not persuade me that I should give “little weight” to the statements of the accounts.

11. [18]

    The balance sheet of Wontok as disclosed in those accounts is in the following form:

12. [19]

    The balance sheet shows that Wontok had net assets of $7,398,253 as at 31 December 2021.

13. [20]

    One of the current assets disclosed in the balance sheet is “trade and other receivables” of $4,636,861 that, the notes to the accounts reveal, is comprised of “trade receivables” of $319,131 and “other receivables” of $4,317,730.

14. [21]

    As Ms Williams pointed out, the “other receivables” comprised of 83.5% of Wontok’s current assets as at 31 December 2021.

15. [22]

    Wontok’s solicitor, Ms Jane Owen, has given unchallenged evidence that:

16. [23]

    Ms Owen also gave evidence that:

17. [24]

    Ms Owen’s statement, on information and belief from Mr Perry, does not set out upon what basis Mr Perry made these statements. However, the evidence was admitted without objection. [4]

18. [25]

    As Ms Williams pointed out, there is no evidence on this application as to the circumstances in which the “other receivables” came to be owing to Wontok by its “related entities” nor as to the terms of the repayment arrangements between Wontok and those related entities.

19. [26]

    However, Wontok has included “other receivables” as part of its “current assets” and its directors have declared that the accounts represent a true and fair view of Wontok’s financial position. In those circumstances, I would infer that the “other receivables” are amounts which are payable by Wontok’s related entities to Wontok on demand; rather than infer, as Ms Williams invited me to, that the “other receivables” had been wrongly characterised in the balance sheet as “current” assets.

20. [27]

    Wontok appears to be an established trading company. It provided software to Telstra for 11 years.

21. [28]

    Ms Owen has given evidence on information and belief from Mr Perry that:

22. [29]

    In those circumstances, I see no reason to assume that Wontok’s related companies would not meet any demand for payment of amounts owing to Wontok, nor that Wontok could not realise this asset if necessary, were it to be faced with an adverse costs order.

23. [30]

    Wontok’s balance sheet as at 31 December 2021 also shows as “non-current assets” “property, plant and equipment” of $2,705,438.

24. [31]

    The notes to the accounts show that this figure comprises of “IT Infrastructure & Application Development” of $4,650,370 less “Accumulated Depreciation” of $1,944,932.

25. [32]

    In relation to this asset, Ms Owen gave this evidence on information and believe from Mr Perry:

26. [33]

    Ms Williams did object to this evidence, which I allowed only as evidence of Mr Perry having expressed to Ms Owen the beliefs recorded.

27. [34]

    The “IT Infrastructure & Application Development”, referred to as being a component of “Property, Plant and Equipment”, is the antivirus and cyber-security software the subject of these proceedings.

28. [35]

    Wontok is able to use that software by reason of a “Distribution Agreement” made between it and Wontok International Ltd dated 30 September 2011. One term of that agreement is that Wontok cannot “assign or otherwise transfer any of its rights” under the agreement without the consent of Wontok International Ltd. This suggests that, whatever may be the true value of the software, it is unlikely that Wontok could easily dispose of it in order to raise funds to meet any adverse costs order in these proceedings.

29. [36]

    Ms Williams also drew attention to a “Copyright Assignment Agreement” made between Wontok and Wontok International Ltd on 19 November 2021 which purports to assign to Wontok the software in question for consideration of $1; albeit on the condition that Wontok International Ltd has the option to “buy back the Copyright in the Works” for $1. That agreement was entered into after Wontok commenced the proceedings against Telstra. It provides further reason to conclude that Wontok would not be easily able to realise any funds of significance in relation to the software, were it visited with an adverse costs order. Accordingly, for present purposes, I propose to disregard this asset when considering Wontok’s balance sheet.

30. [37]

    However, the fact remains, assuming that the “non-current asset” is ignored, Wontok’s balance sheet shows an excess of assets over liabilities in the order of $4,696,000.

31. [38]

    Further, even if the “current assets” of “other receivables” is ignored, Wontok’s assets exceeds its liabilities by some $376,000.

32. [39]

    Wontok’s income statement for the half-year ending 31 December 2021 is in this form:

33. [40]

    There is no doubt that Wontok’s revenue has dropped dramatically.

34. [41]

    The notes to the account reveal that this drop in revenue is primarily by reason of the drop in license fees which, I would infer at this stage, is by reason of Telstra’s termination of the license arrangement.

35. [42]

    Nonetheless, Wontok achieved a net profit after tax of $222,042 for the six months to 31 December 2021.

36. [43]

    I have set out above Ms Owen’s evidence, on information and belief from Mr Perry, that Wontok will continue to conduct its software business in Australia, regardless of the outcome of these proceedings.

37. [44]

    Ms Owen also gave unchallenged evidence that:

38. [45]

    In these circumstances, I am not persuaded that there is reason to believe that Wontok will be unable to meet an adverse costs order in these proceedings.

Discretionary factors

1. [46]

   Assuming I am wrong in coming to that conclusion, I think that Mr Burnett, who appeared on behalf of Wontok, was correct to submit that the magnitude of risk that an adverse costs order would not be met is low [5] and that this provides a further reason to decline to order security.

2. [47]

   I am not persuaded that there are any other discretionary factors which would warrant declining to order security, had I been satisfied that there was reason to believe that Wontok would not be able to meet an adverse costs order.

3. [48]

   Wontok does not suggest that an order for security would stifle the proceedings.

4. [49]

   There has been some delay by Telstra in bringing the application, but not such delay as would, itself, warrant refusing to order security were a case for security otherwise made out.

5. [50]

   Mr Burnett submitted that such financial difficulty under which Wontok may be labouring was caused by the conduct of Telstra of which it complains in these proceedings.

6. [51]

   However, Wontok produced no evidence to support that conclusion. The only evidence to which I was directed was Ms Owen’s evidence that:

7. [52]

   That evidence was not directed to the proposition that conduct complained of by Wontok in these proceedings is the cause of its current financial position.

Quantum

1. [53]

   In view of the conclusion to which I have come, it is not necessary for me to express any opinion about the quantum of costs sought by Telstra.

2. [54]

   Nonetheless, I shall do so albeit briefly.

3. [55]

   Telstra did not adduce evidence from a costs assessor.

4. [56]

   Telstra’s solicitor, Mr Jason Oliver, estimated that Telstra’s total costs of the proceedings would be in the order of $792,000. Mr Oliver applied a discount of between 65% to 75% to reflect the difference between solicitor/client and party/party costs and thus opined that Telstra’s likely recoverable costs were some $595,000.

5. [57]

   As Mr Burnett submitted, Mr Oliver, in calculating Telstra’s likely solicitor/client costs, made very generous estimates of the time that would be taken to prepare Telstra’s evidence, organise discovery, participate in settlement negotiations and mediation, prepare for trial and conduct the trial.

6. [58]

   For example, Mr Oliver estimated that junior counsel would be engaged for 12 days, a lawyer for 16 days, a paralegal for 8 days, special counsel for 8 days and a partner for 1 day in relation to preparation of Telstra’s evidence. Mr Oliver also estimated that, for discovery, a lawyer would be engaged for 33 days, a paralegal for 48 days and special counsel for 6 days.

7. [59]

   In relation to preparation for trial, Mr Oliver estimated that junior counsel would be required for 13 days, a lawyer for 18 days, a paralegal for 7 days and special counsel for 13 days.

8. [60]

   Accepting that a broad-brush approach is required when assessing the quantum of costs for security for costs, Ms Owen’s estimate of between $325,000 and $375,000 appears to me to be a more realistic estimate of Telstra’s likely recoverable costs.

9. [61]

   Were I inclined to order security for costs, I would have ordered costs within that range.

Conclusion

1. [62]

   The defendant’s Notice of Motion of 12 April 2022 is dismissed with costs.