Allco Funds Management Ltd (Receivers and Managers Appointed) (in Liq) v Trust Company

Supreme Court of NSW|2013-09-20|Before: Stevenson J, Brereton J

Background 9Prior to 15 December 2006, Allco invested $109.7 million in the Australian Wholesale Property Fund ("the Fund"). Allco made that investment by subscribing for units in the Fund. 10At that time, Record Fund Management Ltd ("Record") was the responsible entity of the Fund. In February 2009, Trust Company became the responsible entity for the Fund. All references in these reasons to Record and Trust Company are to those entities acting in that capacity. 11On 15 December 2006, Allco and Record entered into a Loan Agreement pursuant to which Allco agreed to "lend" Record $109.7 million; the amount of Allco's original investment. 12The Loan Agreement provided that the "interest rate" on the "Loan Amount" would be equal to the distribution that Allco would otherwise have received by reason of its subscription for units in the Fund. 13Clause 3.1 of the Loan Agreement provided that the "borrower" (Record) must repay the Loan Amount on the "Repayment Date"; defined to be 31 January 2009. 14Clause 6.1 of the Loan Agreement provided: "Any payments ... must be made free and clear of any set off... unless prohibited by law." 15I was told, during argument, that this step was taken because of an apprehension of one or more of the parties that a particular stamp duty exemption would be lost unless the transaction was "converted from equity to debt" for stamp duty purposes. 16A short time later, Allco and Record entered into a further agreement called "Loan Agreement: Deed of Amendment" ("the Deed of Amendment"). The Deed of Amendment is undated; however, its "Effective Date" is stated to be 22 December 2006. 17By that document, the definition of "Repayment Date" in the Loan Agreement (31 January 2009) was deleted and the following definition of "Repayment Date" was inserted: "The earlier of: (i) the date on which [the Fund] is terminated; and (ii) the date on which [Record] receives the proceeds of subscriptions for further units in [the Fund] which are available for the purpose of, and which are in an amount sufficient to, fully and finally repay the Loan Amount and any accrued interest." 18I was told during argument that the Deed of Amendment was entered into because "a problem arose about accounting for the transactions as equity". 19Mr Hewitt, who appeared for Allco, submitted that: "... the effect of the Deed of Amendment was to make the date for repayment of the loans within the complete control of the borrower". 20I was told that the transaction is now recorded in the books of the Fund as "equity". 21In 2008, receivers were appointed to Allco. On 26 May 2009, Allco was placed into liquidation. 22The outstanding balance of Allco's investment in the Fund is now in the order of $88.9 million.

Allco's claim in the proceedings 23Allco seeks rescission of the Deed of Amendment. It contends that if the Deed of Amendment is rescinded, the loan will be due and payable. 24As originally formulated, Allco's attack on the Deed of Amendment focused on allegations of breach of duty by Mr Timothy Rich and Mr Christopher West, who were directors of both Allco and Record. 25For the most part, such claims as were originally made against Record were made against Trust Company as the current responsible entity of the Fund and thus the party now responsible for the conduct of Record. 26By amendments made to its Commercial List Statement on 10 July 2013, Allco now alleges that Trust Company has itself engaged in unconscionable conduct in seeking to rely on its "legal rights" under the Loan Agreement and Deed of Amendment with knowledge of particular matters. 27The matter was originally fixed for hearing for four days in August 2012. By reason of the amendments to the Commercial List Statement, that hearing date was vacated. 28Mr Pike SC, who appeared with Mr Keizer for Trust Company, submitted the hearing of the matter is now likely to take six days.

The threshold question 29Mr Hewitt submitted that, were a costs order to be made against Allco in these proceedings, Allco would be entitled to set off its liability for costs against the amount "due" by Trust Company by reason of s 553C(1) of the Corporations Act (Cth), s 21 of the Civil Procedure Act 2005, or at general law. 30Mr Hewitt submitted that the existence of that entitlement had the consequence that there was no reason to believe Allco could not meet an adverse costs order because, once any liability for costs arose, it would automatically be met by operation of the set off. 31Section 553C(1) of the Corporations Act (Cth) is in the following terms: " ... where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be. " 32It is common ground that the "mutual dealings" to which s 553C refers must exist at the date of the winding up of Allco. The dealings must be such that they are: "... capable of giving rise to, and subsequently [do] give rise to, 'mutual' claims". (Gye v McIntyre (1991) 171 CLR 609 at 623 per Mason CJ and Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ). 33The dealings must be "commensurable" in the sense described by Dixon J in Hiley v People's Prudential Assurance Co Ltd (in Liq) (1938) 60 CLR 468 at 497: "It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set-off." 34Mr Hewitt submitted that the "mutual dealings" in this case are comprised in the Loan Agreement. 35It is true that, in the Loan Agreement, there are mutual dealings, in the sense of corresponding promises and obligations. But any obligation that Allco might have to pay costs to Trust Company in these proceedings will not arise under the Loan Agreement. It will arise because of lack of success in these proceedings; which were commenced after Allco's winding up. 36Further, the account contemplated by s 553C is of amounts "due" between the parties. If an adverse costs order is made against Allco in favour of Trust Company, there will certainly be an amount "due" by Allco to Trust Company. But such an order will only arise if Allco is unsuccessful in the proceedings. In that event, its attack on the Deed of Amendment will fail, and the position will remain, as Mr Hewitt put it, that "the date for repayment of the loans [will be] within the complete control of" Trust Company. 37The evidence establishes that the Fund currently has a medium to long term investment strategy, with its property assets held as medium to long term investments. Trust Company currently has no intention of selling those assets and return capital to investors, or to terminate the Fund. 38The Loan Agreement makes clear that the loan is a limited recourse loan. Allco cannot recover repayment (whether of principal or interest) except to the extent that the Fund has received defined subscriptions. It is unlikely that there will be subscription for further units in the Fund. 39Further, the evidence establishes that there is little likelihood that funds will be available to make any interest payments or distributions in the foreseeable future. There is thus little prospect of payments being made (whether of interest or principal) in the short to medium term future, against which Allco's prospective liability to pay costs might be set off. 40In that circumstance, I cannot see how it could be contended that any amount will, at such time as Allco may be liable to pay costs to Trustee Company, be "due" by Trust Company to Allco. 41My conclusion is that, were an adverse costs order to be made against Allco, no set off would arise under s 553C. 42Allco also relies on s 21(1) of the Civil Procedure Act. That subsection is in the following terms: "(1) If there are mutual debts between a plaintiff and a defendant in any proceedings, the defendant may, by way of defence, set off against the plaintiff's claim any debt that is owed by the plaintiff to the defendant and that was due and payable at the time the defence of set-off was filed, whether or not the mutual debts are different in nature." 43Subsection 21(1) only applies if there are "mutual debts between a plaintiff and a defendant in any proceedings". The statutory set off arises at the time the defence of set off is filed. The section has no application to create a set off with respect to a costs order against a plaintiff, upon the plaintiff being unsuccessful in those proceedings. 44The plaintiff also relies on set off in accordance with the principles discussed in Process Engineering Pty Ltd v Derby Meat Processing Co Ltd [1977] WAR 145 at 146 - 7. 45However, as Trust Company submits: "... any such set off will give way to the express provision against set off in clause 6.1 of the Loan Agreement. In any event, the set off will not be available until such time as [Trust Company] owes a debt to [Allco] under the Loan Agreement...[I]f and when that will occur is presently uncertain. The evidence is that it is unlikely to happen in the short to medium-term future." 46The object of an order for security is to provide: "... a successful defendant with ready and certain access to the amount secured if and when entitlement to claim it arises." (Ashington Capital Pty Ltd v Parissen Capital (Project X) Pty Ltd [2012] NSWSC 410 at [41] per Nicholas J). 47Set off of the kind discussed in Process Engineering would not give Trust Company "ready and certain access" to the amount secured. 48I therefore conclude that there are no rights of set off available to Allco which would, themselves, have the effect that there is no reason to believe that Allco would not be able to meet an adverse costs order. 49It is otherwise quite clear that Allco could not meet an adverse costs order. 50It has been in liquidation since 26 May 2009. 51The Report as to Affairs for Allco lodged with the Australian Securities and Investment Commission ("ASIC") on 2 January 2009 discloses that Allco's: (a)total "assets" are in the order of negative $576 million; (b)unsecured creditors are in the order of $284 million; and (c)estimated net deficiency is in the order of $861 million. 52The Report as to Affairs lodged with ASIC on 3 April 2009 discloses that Allco's: (a)assets which are not specifically charged have an estimated realisable value in the order of $76 million; but that (b)unsecured creditors are owed something in the order of $243 million. 53In those circumstances, there is, to say the least, reason to believe that Allco would not be able to meet an adverse costs order.

Discretion 54Allco does not suggest that the proceedings will be stultified if an order for security is made. 55On the question of discretion, Allco relied, first, on its contention of an entitlement to set off. I have dealt with that contention. 56Mr Hewitt also submitted that the security sought is not proportionate to the complexity of the subject matter in dispute. Mr Hewitt submitted that Allco's case would be documentary and would centre on the circumstances of the creation of the Loan Agreement and the Deed of Amendment. He submitted that the dispute as to factual matters was likely to be narrow. 57Nonetheless, as I have mentioned, the amendments made to the Commercial List Statement focus Allco's case more directly on the alleged conduct of Trust Company than was hitherto the case. The amendments resulted in the original trial date (August this year) being vacated and now, at least from Trust Company's perception, the hearing is likely to take something in the order of six days. 58Accepting that satisfaction of the "threshold" question does not lead to a predisposition to order security, it appears to me that this is a case where it is appropriate that security be provided. Allco is in liquidation. If it is unsuccessful, absent provision of security, Trust Company will rank as an unsecured creditor and will, on the evidence before me, recover nothing, or next to nothing. 59Whether the amount of security sought is disproportionate to the issues is a matter best considered in the context of quantification of security.

Quantification of security 60It is common, and desirable, that applications for security for costs are accompanied with expert evidence (whether from a costs assessor or an appropriate legal practitioner) as to the likely recoverable costs of the defendant (see, for example, Narradine Pty Ltd v Mascot Steel and Tools Pty Ltd [2012] NSWSC 385 at [23] per Black J). 61Trust Company has not adduced any such evidence. 62Rather, it relies upon evidence of its solicitor, Ms Anne McCartney, as to the amount of costs that Trust Company actually has incurred and will incur in the proceedings. 63Ms McCartney gave evidence that Trust Company's costs and disbursements to 28 August 2013 were approximately $840,000. The only particulars given of that sum are as follows: Category of work Costs incurred (1) Consideration and preparation of pleadings $25,000 (2) Documents (discovery to and from Allco and obtaining documents by way of subpoena) $75,000 (3) General matter management, including consideration of issues, preparation of advises, briefing, instructing counsel and attendances on client $165,000 (4) Directions hearing on 8 February 2013 $5,000 (5) Preparation of affidavits (including interviews of witnesses) $150,000 (6) Mediation $60,000 (7) Disbursements incurred in defending original claim $130,000 (8) Costs in relation to Allco's application for leave to amend $100,000 (9) Costs incurred in defending the amended claim $130,000

64No further particulars were given. Nor did Ms McCartney assert, let alone prove, that these costs were reasonable. 65Ms McCartney has estimated that future costs and disbursements, up to and including a six day trial, will be $380,000. Ms McCartney has prepared a spreadsheet in which she sets out, in some detail, the work she predicts will be needed. The spreadsheet shows a range of "low", "high" and "midpoint" time estimates for that work. Ms McCartney has applied to those time estimates the actual fee rates for the three solicitors who will be working on the matter. There was, however, no evidence that those fee rates are reasonable. 66Mr Hewitt submitted that some of the costs already incurred appear to be substantially in excess of what is reasonable and what is likely to be awarded on an assessment. 67For example, Mr Hewitt pointed to Ms McCartney's evidence that Trust Company's costs of the preparation of this application for security were $25,000: some 50 hours work. The application for security was supported by Ms McCartney's affidavit. I see substance in Mr Hewitt's submission that it is hard to see how preparation of that affidavit, and the motion for security, could have taken anything like 50 hours. 68Mr Pike submitted that I should take a broad-brush approach. The total of estimated costs and disbursements is in the order of $1.2 million. $250,000 security has already been provided. Mr Pike submitted that provision of a further $500,000 security would reflect a "conservative" 62.5 per cent recovery on assessment ($750,000/$1,200,000). 69The difficulty with that submission is that the evidence does not enable me to conclude whether provision of further security in the sum of $500,000 would reflect such a "conservative" recovery. It also requires me to assume that an assessment of Trust Company's costs in this matter would yield a figure of at least 62.5 per cent of Trust Company's actual costs. 70I accept that, were Trust Company to obtain an order for costs, it is likely that those costs would be assessed at some figure in excess of $250,000. I am not, however, able to say whether it would be as high as $750,000. 71The unsatisfactory state of the evidence has the result that I am left to, in effect, guess what Trust Company's likely assessed costs would be. 72It was for Trust Company to prove the likely figure. It could easily have done so had it adopted the usual practice of adducing expert evidence as to Trust Company's likely recoverable costs. It may well be that Ms McCartney could have given that evidence. But she did not. 73I am not prepared to accept $750,000 as Trust Company's likely assessed costs. Trust Company was prepared to accept $250,000 as the appropriate figure in respect of the case against it as originally formulated. Ultimately, that case was allocated four hearing days. Trust Company now estimates that six hearing days (that is, 50 per cent more hearing time) will be needed to accommodate Allco's amended case. 74The best I can do with this evidence is conclude that it is likely that Trust Company's assessed costs will, correspondingly to the increased hearing time now anticipated by Trust Company's legal advisers, be no less than 50 per cent more than the amount of security originally agreed; that is a total of $375,000. I therefore propose to order that Allco provide further security in an amount equal to the difference between that figure and the amount of security already provided; that is, a further $125,000. 75I invite the parties to bring in short minutes of order to give effect to these reasons. If costs cannot be agreed, I will hear argument as to costs. My preliminary view is that costs should be Trust Company's costs in the cause.

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General principles 3The Court's power to award security for costs against a plaintiff arises in two ways. First under r 42.21 of the Uniform Civil Procedure Rules 2005 ("UCPR") and second under s 1335 of the Corporations Act 2001 (Cth). The power to award security for costs is discretionary, and must be exercised having regard to all the circumstances of the case. The recently enacted UCPR r 42.21(1A) reflects several judicially identified circumstances relevant to the exercise of the discretion. 4The Court's power to award security in respect of a corporation arises if "there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so" (UCPR r 42.21(1)(d)) or "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" (s 1335(1) of the Corporations Act (Cth)). I see no distinction between these provisions for the purposes of this application. 5In determining applications such as these, the Court generally engages in a three stage process (see, for example, KDL Building Pty Ltd v Mount [2006] NSWSC 474 at [6] per Brereton J): (1)first, the Court determines whether there is reason to believe that, on the basis of credible evidence, the corporation will be unable to pay the costs of the defendants if they are successful in their defence. This is often referred to as the "threshold" question. The Court's jurisdiction to award security for costs is not enlivened unless the Court so determines. The evidentiary burden of demonstrating this rests on the applicant for security: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [60] per Einstein J; (2)second, if the Court is satisfied that the "threshold" test has been met, the Court examines various other factors relevant to the exercise of its discretion; and (3)finally, if the Court determines that it should exercise its discretion to order security for costs, the Court must then consider what the relevant quantum of that security should be, and the appropriate form of provision of that security. 6The burden rests upon those seeking security "from first to last" to persuade the Court that an order for security should be made: Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377 at [21] per Maxwell P and Buchanan JA. 7Satisfaction of the "threshold" question, if achieved, does not "predispose" the Court to exercise its discretion in favour of ordering security. If the "threshold" is met, the question of whether, in the particular case, security should be ordered depends on all the circumstances (see, for example, Ariss v Express Interiors Pty Ltd (in Liq) [1996] 2 VR 507 at 511 - 513 per Phillips JA (with whom Ormiston and Charles JJA agreed)). 8The "reason to believe" threshold question is one that has been described as being "undemanding". Recently, Ward JA cited with approval the observations of Maxwell P and Buchanan JA in Livingspring at [15] as follows: "The phrase 'reason to believe' is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more. The wording adopted may be contrasted with other familiar formulations such as 'If the court is satisfied that ...' or 'If in the view of the court it is likely that ...'. The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a "real risk".) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs." (HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87 at [7]; see also generally [6] - [9]).

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