104 Alice Street Pty Limited v Jabamak Pty Limited and Ors

CATCHWORDS : PRACTICE AND PROCEDURE - security for costs - order made for security for costs in 2007 - application for further security for costs - applicable principles - application dismissed

Corporations Act 2001 (Cth) LEGISLATION CITED : Civil Procedure Act 2005 Uniform Civil Procedure Rules 2005

Jazabas Pty Limited v Haddad (2007) 65 ACSR 276; [2007] NSWCA 291 KP Cable Investments Pty Limited v Meltglow Pty Limited (1995) 56 FCR 189 CASES CITED : Dae Boong International Co Pty Limited v Gray [2009] NSWCA 11 Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744 Bell Wholesale Co Limited v Gates Export Corporation (1984) 2 FCR 1

104 Alice Street Pty Limited (Plaintiff) Jabamak Pty Limited (First Defendant) PARTIES : MPS Financial Services Pty Limited (Second Defendant) Ignatio Hilellis (also known as Charlie Hill) (Third Defendant) Geoff Versace (Fourth Defendant) Steven Valtas (Fifth Defendant)

Dr A Morrison SC; Mr A Reoch (Plaintiff) No Appearance (First Defendant) COUNSEL : Mr G Caramanlis (Second and Third Defendants) Mr PW Arblaster (Fourth Defendant) Mr ATS Dawson (Fifth Defendant)

Dostalek & Co (Plaintiff) SOLICITORS : Daniels Lawyers (Second and Third Defendants) Colin Biggers & Paisley (Fourth Defendant) Yeldham Price O'Brien Lusk (Fifth Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION PROFESSIONAL NEGLIGENCE LIST

20241/08 104 Alice Street Pty Limited v Jabamak Pty Limited and Four Others

JUDGMENT (on application for further security for costs) 1 JOHNSON J: By Notices of Motion, application is made by four of the Defendants in these proceedings that the Plaintiff provide further security for costs.

The Plaintiff's Claims against the Defendants 2 The Plaintiff, 104 Alice Street Pty Limited, sues five Defendants. The First Defendant is Jabamak Pty Limited; the Second Defendant is MPS Financial Services Pty Limited; the Third Defendant is Ignatio Hilellis, also known as Charlie Hill; the Fourth Defendant is Geoff Versace, and the Fifth Defendant is Steven Valtas. 3 A proposed Further Amended Statement of Claim was furnished to the Defendants in late 2007. The claims of the Plaintiff encapsulated in that document can be briefly described as follows. 4 The proceedings arise out of a development project concerning property at 104 Alice Street, Newtown. The Plaintiff was the registered proprietor of that property. At all respective times, Timothy Zevi Rosenblum was the sole director and secretary of the Plaintiff company. 5 It is alleged that the Plaintiff conceived a proposal for the development of the property into 34 residential apartments, two shops and associated car spaces, the strata titling of those units and their sale. 6 The Plaintiff alleges that, in March 2002, it entered into a joint venture with the First Defendant for the completion of the project. 7 The Plaintiff alleges that, in October 2002, the joint venture agreement was varied, and that at about that time, and on the recommendation of the First Defendant, the Plaintiff entered into an agreement with the Third Defendant pursuant to which the Third Defendant agreed to procure sales to others of all the lots in the project. It is alleged that the Third Defendant granted to the Plaintiff a put option in respect of all the lots in the project. It is alleged that on 31 October 2002, the Second Defendant executed a put option agreement in favour of the Plaintiff. 8 The Plaintiff alleges that it has suffered damage and loss as a result of breaches by the Second and Third Defendants. The Plaintiff alleges further that the First Defendant breached the joint venture agreement with the Plaintiff, and breached its fiduciary duty to the Plaintiff so that the Plaintiff is entitled to damages from the First, Second and Third Defendants. 9 The Fourth Defendant practised as a solicitor under the name Versace and Co. The Plaintiff alleges that it retained the Fourth Defendant to act as its solicitor, and also to advise on commercial aspects of the transactions. The Plaintiff alleges that the Fourth Defendant breached his duty to the Plaintiff in several respects so as to cause loss and damage to the Plaintiff. 10 The Fifth Defendant practised as a solicitor under the name Steven Valtas and Co. The Plaintiff alleges that it retained the Fifth Defendant to act as solicitor on the sales of lots in the project. It is alleged that the Fifth Defendant breached his duty to the Plaintiff in various respects, so as to cause loss or damage to the Plaintiff.

History of Proceedings 11 The Plaintiff commenced proceedings in the District Court by the filing of a Statement of Claim on 6 March 2006. Defences and Cross Claims were filed in the District Court in 2006. 12 On 11 May 2007, his Honour Judge Hughes made an order for security for costs in the District Court in favour of the Second, Third, Fourth and Fifth Defendants in a total sum of $126,000.00 - that is $42,000.00 in respect of the Second and Third Defendants; $42,000.00 in respect of the Fourth Defendant; and $42,000.00 in respect of the Fifth Defendant. Although there was some suggestion in an affidavit filed on behalf of one of the Defendants that four orders in the sum of $42,000.00 each had been made by his Honour Judge Hughes (leading to an order in the total sum of $168,000.00) and that this order had not been complied with, I note that the affidavit of Mr Caramanlis, the solicitor for the Second and Third Defendants, sworn 28 November 2008 (at paragraph 5) stated that the sum of $42,000.00 was ordered with respect to each of three sets of Defendants, one set of Defendants being his clients, the Second and Third Defendants. 13 I approach this application on the basis that the Plaintiff complied with the order of his Honour Judge Hughes in lodging security for costs, as ultimately occurred, in the sum of $126,000.00. 14 Initially, security was not provided in accordance with the order, and the Defendants sought dismissal of the proceedings in the District Court. On 17 August 2007, his Honour Judge Garling gave the Plaintiff a further opportunity to pay this sum into Court by way of security for costs, and this the Plaintiff ultimately did on 24 October 2007. 15 In late 2007, as I have observed, the Plaintiff served on the Defendants a proposed Further Amended Statement of Claim. It appears, from what I was told during the course of the hearing yesterday, that the Fifth Defendant consented to the amendments after particulars had been provided by the Plaintiff. It appears that the Second, Third and Fourth Defendants did not indicate consent, certainly not clear consent, to the amendments. Thus, the Further Amended Statement of Claim was not formally filed in the District Court, or for that matter in this Court. 16 The Plaintiff's claim, as formulated in the proposed Further Amended Statement of Claim, caused the Plaintiff's legal representatives to seek the Defendants' consent to unlimited jurisdiction in the District Court proceedings. As was their right, the Defendants did not consent to unlimited jurisdiction, and on 29 May 2008, an order was made transferring the proceedings to the Supreme Court. 17 By this time, the Plaintiff had served on the Defendants an affidavit of Mr Rosenblum sworn 4 March 2008, which constitutes the evidentiary foundation of the Plaintiff's case. As will be seen, later in 2008 the Plaintiff served on the Defendants an expert report of Neville Moses dated 22 October 2008 in support of the Plaintiff's claim, in particular against the Fourth and Fifth Defendants. 18 On 29 October 2008, Registrar Bradford made orders requiring, amongst other things, that the Defendants file and serve any application for further security for costs by 30 November 2008.

The Present Application for Further Security of Costs 19 By Notice of Motion filed 5 December 2008, the Second and Third Defendants sought that the Plaintiff provide security for costs, pursuant to r.42.21 Uniform Civil Procedure Rules 2005 ("UCPR"), and a stay of the proceedings until such security was provided. 20 By Notice of Motion filed 22 October 2008, the Fourth Defendant sought similar orders. 21 By Notice of Motion filed 19 November 2008, the Fifth Defendant sought similar orders, with an alternative claim that security for costs be ordered pursuant to s.1335 Corporations Act 2001 (Cth). 22 The hearing of those Notices of Motion proceeded before me yesterday. Mr Arblaster appeared for the Fourth Defendant, and Mr Dawson appeared for the Fifth Defendant. Mr Caramanlis appeared for the Second and Third Defendants. There was no appearance for the First Defendant. Dr Morrison SC and Mr Reoch appeared for the Plaintiff and opposed the application for further security for costs.

Evidence on the Application 23 A number of affidavits were read on the application. None of the deponents were required for cross-examination. The evidence fell within the following broad categories: (a) a history of the litigation including the previous order for security for costs; (b) the financial positions of the Plaintiff and Mr Rosenblum;

(c) costs incurred by the Defendants since May 2007; and

(d) the projected costs for the Defendants for the balance of the litigation. 24 Written and oral submissions were made by counsel for the Fourth and Fifth Defendants and the Plaintiff yesterday. Mr Caramanlis adopted the submissions advanced on behalf of the Fourth and Fifth Defendants, and made no independent submission in support of the application.

Applicable Principles 25 The principles to be applied on an application for security for costs under r.42.21 UCPR and/or s.1335 Corporations Act 2001 (Cth) are not in doubt. In Jazabas Pty Limited v Haddad (2007) 65 ACSR 276; [2007] NSWCA 291, McClellan CJ at CL (Mason P agreeing) observed at [74] that a convenient summary of the relevant principles was made by Beazley J (as her Honour then was) in KP Cable Investments Pty Limited v Meltglow Pty Limited (1995) 56 FCR 189 at 196-198. 26 In this case, there is no issue that the threshold requirement of r.42.21(1)(d) UCPR and s.1335(1) Corporations Act 2001 (Cth) has been established. There is reason to believe that the Plaintiff, being a corporation, will be unable to pay the costs of the Defendants if ordered to do so. The real question here is whether the Court ought exercise its discretion to order further security for costs. 27 The discretion to order security for costs is unfettered, and should be exercised having regard to all the circumstances of the case without any predisposition in favour of the award of security: KP Cable Investments at 196.

A Second Application for Security for Costs 28 I will turn shortly to consider the submissions of the parties by reference to the list of factors or guidelines in KP Cable Investments. Before doing so, however, there is a discrete issue to which reference should be made. This is the second application for security for costs in these proceedings. An order for security for costs was made in favour of the Defendants by his Honour Judge Hughes on 11 May 2007. 29 The Plaintiff submits that this is a form of review or appeal by the Defendants, dressed up as a second application. Reliance is placed by the Plaintiff on the decision of Hodgson JA in Dae Boong International Co Pty Limited v Gray [2009] NSWCA 11 at [17]-[19] concerning the approach to be taken by a Judge on a review of an earlier decision by a Registrar with respect to security for costs. 30 I do not think these principles apply to the present case. His Honour Judge Hughes made an order for security for costs. There was no appeal or application for leave to appeal to the Court of Appeal brought from that decision. The Defendants now make a further application for security for costs. There is no statutory impediment to such an application. If the proceedings were still in the District Court, a second application could be made. The fact that the proceedings have been transferred to this Court does not alter the position. 31 Of course, it will be a relevant factor in the determination of the second application to consider the fact that an earlier order was made, and what has happened in the litigation since, in particular what has changed in the proceedings. The present application is to be considered on its merits.

Arguments and Findings 32 I return to the factors or guidelines referred to by Beazley J in KP Cable Investments at 196 - 198, which I will use as headings to consider the submissions of the parties. 33 Firstly, the application should be brought promptly. The order of his Honour Judge Hughes was made on 11 May 2007, and these applications for further orders were not made until October-November 2008. Competing submissions were made by counsel on this issue. It is the fact that the Defendants have had the proposed Further Amended Statement of Claim since late 2007, and that the principal arguments advanced by the Fourth and Fifth Defendants concerning the suggested change in circumstances in the case relate to this document. It is correct that the Further Amended Statement of Claim has not yet been filed and has remained as a proposed amended pleading for some time. 34 As I have mentioned, Defences and Cross Claims had been filed in the District Court in 2006 by reference to the original Statement of Claim. What appears to have provoked the present application is the transfer of the proceedings to this Court, accompanied by the need for the Defendants to take further steps in preparation of the matter. 35 The Plaintiff has referred to the decision of Einstein J in Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744 at [69] where his Honour observed, in the context of delay, that the authorities have recognised that it would be unjust to permit a defendant who stood by and allowed the plaintiff to work on their case, to ask for security after expenses had been incurred. I accept that the Plaintiff has continued to incur costs working on this case since May 2007, and now faces a further application by the Defendants. 36 Although there has been some delay on the part of the Defendants in bringing this second application, I do not consider that it weighs heavily against the application in this case. 37 Secondly, regard is to be had to the strength and bona fide of the Plaintiff's case. In Jazabas Pty Limited v Haddad, McClellan CJ at CL observed at [83] that the question which must be asked is whether the Plaintiff's case is bona fide and raises real issues to be tried. His Honour observed that, unless obviously hopeless, the prospect of success or failure is of little relevance, and that this must especially be the case where the issues to be litigated are complex. 38 Counsel for the Fourth and Fifth Defendants have challenged the strength of the Plaintiff's case against their clients. Since the hearing before his Honour Judge Hughes, the Plaintiff has served the affidavit of Mr Rosenblum sworn 4 March 2008 and the expert report of Mr Moses dated 22 October 2008. Thus, there is material available, in addition to the pleadings and the proposed Further Amended Statement of Claim, to allow an assessment of this second factor. The Fourth and Fifth Defendants have as yet served no evidence, nor any expert report in the proceedings. Thus, the material before the Court comprises the pleadings, the proposed Further Amended Statement of Claim, the affidavit of Mr Rosenblum, and in particular the report of Mr Moses. 39 I approach the evidence before me for the purpose of applying the test articulated by McClellan CJ at CL in Jazabas Pty Limited v Haddad. The report of Mr Moses assumes certain facts set out in Mr Rosenblum's affidavit of 4 March 2008. It is fair to observe that the report of Mr Moses is stronger in its adverse opinions against the Fourth Defendant than the Fifth Defendant. See, in particular, paragraphs 62, 64, 65, 66 and 73 with respect to the Fourth Defendant and paragraphs 59, 60, 63, 67 to 72 concerning the Fifth Defendant. 40 I am satisfied that the Plaintiff's case against the Fourth Defendant is bona fide and raises real issues to be tried, and is supported by expert evidence. I am satisfied that the Plaintiff's case against the Fifth Defendant is bona fide and raises real issues to be tried, although the clearest claim is modest in proportions ($25,500.00) with other claims having less clear foundations. 41 Thirdly, whether the Plaintiff's impecuniosity is caused by the Defendants' conduct. It is clear that the Plaintiff is impecunious. It might be concluded that had the 104 Alice Street project succeeded, the Plaintiff would have been in a healthier financial position than it presently is. I do not consider, however, on the evidence that the conclusion can be reached that the Defendants have caused the Plaintiff's impecuniosity. 42 Fourthly, whether the Defendants' application for security is oppressive in the sense that it is being used merely to deny an impecunious Plaintiff a right to litigate and, fifthly, whether there is any person standing behind the Plaintiff's company who is likely to benefit from the litigation, and who is willing to provide necessary security. 43 In the circumstances of this case, it is appropriate to consider factors 4 and 5 together. 44 I am satisfied, on the evidence, that the Plaintiff is impecunious. I am satisfied that there is no prospect that the Plaintiff could obtain funds if an order for security for costs is made. I have regard to the direct evidence of Mr Rosenblum concerning the obtaining of funds to pay the $126,000.00 into Court in 2007 under the existing order. I have regard as well to the evidence of Mr Rosenblum concerning his current impecuniosity. That evidence is that some assets owned by him in 2007 have been sold by way of mortgagee sale or otherwise. I am satisfied that the personal financial circumstances of Mr Rosenblum are significantly worse than they were in 2007. There is no evidence to suggest that the financial position of the Plaintiff is any better than it was in 2007. 45 I am satisfied that Mr Rosenblum, as the person who stands behind the Plaintiff, is without means. I am satisfied that any requirement for further security would stultify the litigation: Bell Wholesale Co Limited v Gates Export Corporation (1984) 2 FCR 1 at 4; Dae Boong International Company Pty Limited v Gray at [23]-[26]. 46 It is for the Plaintiff to establish the facts in this respect. It is not for the Defendants to negate these matters. I am satisfied, however, on the balance of probabilities, that the Plaintiff and Mr Rosenblum are impecunious and that there is no prospect that any further order for security for costs could be met. 47 I do not need to determine whether the Defendants are motivated, in bringing this application, by an intention to stultify the litigation, and I make no finding to that effect. It is sufficient to conclude, as I have, that the practical effect of such an order would be to stultify the litigation. A Plaintiff should not be denied access to the courts unless the justice of the case makes it imperative: Jazabas Pty Limited v Haddad at [75]. 48 Sixthly, whether persons standing behind the Plaintiff have offered any personal undertaking to be liable for costs, and if so, the form of any undertaking. Mr Rosenblum has deposed that he will stand behind the company, and is prepared to accept a personal order for costs if the Plaintiff loses. Where Mr Rosenblum is impecunious at present, this may provide limited assistance to the Plaintiff. However, the offer by Mr Rosenblum constitutes an offer of a personal stake and personal exposure to a costs order, in the event that the Plaintiff loses. In that event, it would be open to the Defendants to enforce such an order against him personally, including the prospect of bankruptcy. This is a relevant factor favouring the Plaintiff on the application. 49 The seventh factor identified by Beazley J is that security will only ordinarily be ordered against the party who is in substance a plaintiff, and an order ought not be made against parties who are defending themselves and are thus forced to litigate. That factor appears to have no application in the present case.

Reaching a Discretionary Conclusion 50 I turn then to my conclusion with respect to the exercise of discretion. As Beazley J observed in KP Cable Investments at 196-197, it is necessary to have regard to all factors relevant to the circumstances of the case. 51 An additional and unusual feature in the present case is that this is a second application for security of costs. There is an existing order made. The Defendants have the benefit of an order for security for costs in their favour in a total sum of $126,000.00. This is a not insignificant sum. I have regard, in this respect, to the evidence adduced on this application concerning amounts spent by the Defendants so far, and the projections made. Nevertheless, $126,000.00 is a significant sum and the Defendants have that protection already. 52 I am satisfied that any further order that would be made, and in particular orders of the type and quantum which the Defendants are seeking, would stultify the litigation. The litigation could not effectively proceed. What would follow, it may be fairly predicted, having regard to the events of 2007, is that the Defendants would seek to have the proceedings dismissed with costs, and then to utilise the funds already deposited by way of security for costs to satisfy the costs order, all of that occurring without a hearing on the merits having taken place. Although all of those steps, of course, would be open if those circumstances presented themselves, it is a relevant factor in the circumstances of this second application that I have regard to that scenario as a potential outcome. Indeed, it is more than a potential outcome, and I am satisfied that the stultification in this litigation would make that the almost inevitable outcome. 53 I referred earlier to the statement of McClellan CJ at CL in Jazabas Pty Limited v Haddad at [75] that a plaintiff should not be denied access to the courts unless the justice of the case makes it imperative. I am not satisfied that the justice of this case makes it imperative that further orders ought be made which, in my view, would have the effect of denying the Plaintiff access to the Court. 54 I am satisfied that the Plaintiff has bona fide and arguable cases against the Defendants. No submission on this issue was advanced by the Second and Third Defendants. As I have observed, the Plaintiff's case appears stronger against the Fourth Defendant than the Fifth Defendant. But there is a case against the Fifth Defendant, supported by expert evidence. 55 I am satisfied that there have been some changes in circumstances since May 2007, with the amendments proposed in the Further Amended Statement of Claim. The Defendants can point that to that as being a changed circumstance, affecting the future of the case after May 2007. The Defendants need to do more to respond to the claim. Having said that, amendments to pleadings in litigation of this sort is not unexpected. The scale of the amendments, in my view, are not such as to radically alter the course of the litigation, in a manner which ought weigh strongly in favour of the making of a second order for security of costs. 56 In reality, not much has happened since May 2007 on the Defendants' part. The Defendants pursued in the District Court, with hearings before his Honour Judge Garling, an application to dismiss the proceedings because the sum had not been deposited. Thereafter, the proceedings were moved to this Court. In circumstances where further orders were made to progress the litigation, the Defendants make this application. The Defendants have the affidavit of Mr Rosenblum and the report of Mr Moses, and they have had, for more than a year, the proposed Further Amended Statement of Claim. 57 I am not satisfied that there has been a substantial change in the case which assists the Defendants in any significant way on this application. 58 In my view, the appropriate conclusion is to dismiss the present application for further security for costs and to give directions for the expeditious progress of this litigation in this Court. The parties have an obligation to facilitate the just, quick, and cheap resolution of the real issues in dispute under s.56 Civil Procedure Act 2005, and I will proceed to give directions to advance the litigation in that respect. [Discussion regarding draft orders]

59 I will shortly make orders as proposed by the parties in Short Minutes of Order which have been handed up. The purpose of these orders will be to give effect to the decision I have announced today, and to progress the litigation through its interlocutory phase so that, when the matter is next before the Registrar on 20 July 2009, the proceedings are in a state where the parties are clearly aware of the competing cases to be advanced. 60 On 29 October 2008, the directions made by the Registrar, and consented to by the parties, included a direction that the parties mediate before 31 March 2008 (clearly a mistaken reference to 2009) and that the matter be stood over for further directions or 8 April 2009. I will vacate those orders made by the Registrar on 29 October 2008. In doing so, I note that it remains the wish of the parties to utilise mediation of these proceedings at a future time. In my view, by 20 July 2009, the parties ought be in a position to proceed to mediation, having regard to the steps to be taken in the litigation between now and then. I will not, however, include any order for mediation in the present orders. That will be a matter which the parties can take up when the matter is next before the Registrar. It seems to me highly desirable that this litigation proceed to mediation at a future time. 61 In addition to the orders which I will make shortly, I will give a direction that the affidavit of Martin Grier Dostalek sworn 4 February 2009, which was read at yesterday's hearing be made available to the media. That affidavit has annexed to it the proposed Further Amended Statement of Claim. Having heard the parties, I am satisfied that it is appropriate that this document be available for the media to understand the arguments advanced in the proceedings. 62 Accordingly, I make Orders 1 to 10 in accordance with the Short Minutes of Order provided by the parties. In addition to those orders, I vacate Orders 7 and 8 made by the Registrar on 29 October 2008, that is, vacating the order for mediation and the further directions hearing on 8 April 2009. 63 In addition, I direct that a copy of the affidavit of Martin Grier Dostalek sworn 4 February 2009 be provided to any representative of the media who requests access to it. 64 It be can be noted that the orders I have made have the effect of determining the separate Notice of Motion filed by the Plaintiff on 5 February 2009, seeking leave to file a Further Amended Statement of Claim.

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