Armstrong Scalisi Holdings Pty Ltd v Piscopo

(REVISED FROM THE TRANSCRIPT) RARES J: 1 This is an application by Samuel Piscopo, as trustee of the bankrupt estates of Robert James and Helen Patricia Collins, that Armstrong Scalisi Holdings Pty Limited, the applicant, provide security for costs.

Background 2 The proceedings commenced on 23 December 2016 when Armstrong filed its originating application seeking leave, under s 58(3)(b) of the Bankruptcy Act 1966 (Cth), to commence, carry on and obtain final relief against the bankrupts' estates in respect of a property at Bass Hill that had been registered in their names immediately before they filed debtor's petitions on 19 and 20 April 2016, respectively. Armstrong had lodged a caveat on the certificate of title of the Bass Hill property at the Land Titles Office on about 16 April 2015. The caveat claimed an interest under a deed of mortgage executed by the bankrupts as mortgagees, dated 2 February 2015. The Registrar General issued a lapsing notice in respect of the caveat, under s 74J of the Real Property Act 1900 (NSW), that was served on Armstrong on 20 December 2016. 3 On 30 December 2016, a judge of the Court granted leave to Armstrong to prosecute proceedings in the Supreme Court of New South Wales to seek an extension of the caveat. Judges of the Supreme Court subsequently made orders extending the operation of the caveat until further order so that the proceedings in this Court could be prosecuted. 4 On 6 March 2017, I made directions, which both parties agreed were appropriate, except as to the time in which Armstrong could serve its statement of claim, that the matter proceed by way of pleadings. I ordered that Armstrong file and serve a statement of claim by no later than 10 March 2017, having regard to the lapse of time that had occurred since it had commenced the proceedings and the fact that it was seeking to recover substantial relief. That relief included declarations that: Mr Piscopo, who by then had become registered as proprietor of the bankrupts' estates, held his interest in the Bass Hill property subject to the equities that affected it immediately before his registration as proprietor; Armstrong had an equitable interest in the Bass Hill property in the nature of an equitable mortgage and or an equitable charge (since the mortgage on which Armstrong relied was not in registerable form for the purposes of the Real Property Act); the equitable mortgage or charge secured, in favour of Armstrong, an amount or amounts owing to it by the terms of a deed of agreement dated 25 August 2014 between Armstrong, each of the bankrupts, and their companies, Coachways Australia Pty Ltd, Australian Bus & Coach Hire Pty Ltd and Bus & Coach Captains Pty Ltd, including costs associated with the proceedings, any appeal, any future anticipated costs and costs of $550 per hour incurred by Sam Cassaniti in attending to any matter associated with the proceedings and or establishing the entitlement of Armstrong under the mortgage or deed of agreement. 5 Armstrong also sought costs on an indemnity basis and an order under s 178 of the Bankruptcy Act that Mr Piscopo refrain from causing, or taking any steps to cause, the caveat to lapse. 6 Despite my order on 6 March 2017 that Armstrong file and serve a statement of claim by no later than 10 March 2017, no statement of claim has been filed. This morning, the solicitor for Armstrong, Jim Kekatos, made an affidavit in which he explained that he and counsel whom he had briefed had been extensively engaged in a variety of other proceedings and had not been able to prepare the statement of claim in final form. He attached a draft pleading to the affidavit which requires some further preparation. He said that the draft could be finalised by tomorrow. 7 I also ordered, on 6 March 2017, that any application by Mr Piscopo seeking security for costs be filed and served by no later than 13 March 2017, which has generated the hearing today.

Armstrong's liability to provide security for costs 8 Armstrong has a total paid-up share capital of $100. Its sole director and secretary, Mr Michael Lowe, has put on no evidence, nor has anyone else on behalf of Armstrong, apart from Mr Kekatos's explanatory affidavit of his client's default in compliance with the order to file and serve a statement of claim. I am satisfied that Armstrong owns no real property in Australia, having regard to the evidence of Thomas Russell, a partner in the firm of solicitors on the record for Mr Piscopo in the proceedings. 9 Mr Cassaniti's affidavit of 23 December 2016 in support of Armstrong's claim revealed that, since 1 July 2015, Armstrong had not "generally traded" as a professional services firm, but had continued to provide services on a piecemeal basis to clients who had "fixed-term service contracts" and had been involved in "various pieces of litigation and the recovery of moneys due to it". 10 The alleged securities on which Armstrong seeks relief in these proceedings comprise the deed of agreement and the deed of mortgage dated 2 February 2015 between Armstrong and each of the bankrupts. 11 The deed of agreement recorded that the bankrupts had been clients of Armstrong and that the bankrupts were then currently liable for Armstrong's fees and disbursements associated with the provision of services to them. 12 The operative parts of the deed of agreement: contained an acknowledgement by the bankrupts that they then owed Armstrong an amount of $275,000, inclusive of GST, reflecting a compromise, and that sum was to be payable either on the earlier of 30 June 2016 or an event of default, which included any failure to comply with other provisions of the deed or the event of bankruptcy of one or other of the bankrupts; made provision in respect of Armstrong providing future services for the bankrupts, Coachways and the two other companies that the deed acknowledged had been incorporated in association with the bankrupts' businesses; provided, in cll 7 and 8, that the bankrupts "are indebted to [Armstrong] for the sum of $660,000.00 (inclusive of any G.S.T.)", which it defined as the "Future Fee", that they covenanted was a debt currently owing under the deed of agreement and not subject to any qualifications or contingencies, but "is to be taken as the amount payable to [Armstrong] for agreeing to perform Services as set out above". The Future Fee was payable in three instalments of $220,000 each by 1 April 2015, 2016 and 2017 unless an event of default occurred, in which case all of those sums (or so much as was then outstanding) would be accelerated to become immediately due and payable; provided that the bankrupts would furnish security in favour of Armstrong by way of mortgage in respect of all their interest in any land held in their names, and charge in favour of Armstrong all their non-legal right, title or interest in any land, which would secure, among others, both the $275,000 and the "Future Fee", together with any amounts associated with any future loans and amounts due in respect of time spent by Mr Cassaniti in relation to "chasing payment" from them, payable at the rate of $500 per hour. contained an acknowledgement by the bankrupts that they had been encouraged to seek independent legal and financial advice in relation to deciding whether to enter into it and that they considered doing so to be in their best interests; provided that interest was payable on the amounts owing at the rate of 2.5% per month, compounding daily, that would be waived on the compromised sum from the date of the deed until 30 June 2016, but only if there had been no event of default and all moneys payable under the deed were paid on time. (I note that interest rate is in excess of 30% compound interest per annum.) 13 The mortgage was prepared on A4 paper. It identified the Bass Hill property as its subject and provided that the mortgage was additional to, and did not replace, the deed of agreement. The mortgage secured the payment by the bankrupts of all amounts which they owed, or would come to owe, to Armstrong under the deed of agreement or for any other reason, and provided that, if Armstrong chose to register the mortgage, the mortgagors would thereby and irrevocably authorise Mr Cassaniti to complete a registerable mortgage on their behalf and lodge it for registration at the Land Titles Office. 14 The draft statement of claim pleaded, substantively, the facts of entry into the deed of agreement and mortgage and claimed the amounts due (other than the amounts for interest that needed to be inserted). It pleaded that the bankrupts had failed to pay an instalment of the Future Fee of $220,000, due and payable on 1 April 2015, and that, as a consequence, an event of default had occurred, triggering the liability for the interest to be payable. It alleged that, on 18 April 2016, Armstrong had advanced $15,000 to the bankrupts, being one and two days, respectively, before Mr and Mrs Collins presented his or her debtor's petition, and that Armstrong had advanced a further sum of $52,274.24 to Mrs Collins on 4 July 2016, for which interest was allegedly due and payable. 15 I am satisfied that, for the reasons above, there is reason to believe, for the purposes of s 1335 of the Corporations Act 2001 (Cth), that Armstrong will be unable to pay the costs ordered against it if Mr Piscopo is successful in his defence. It does not appear to have any assets or to be trading. Armstrong should provide security for costs in the stages that I will order.

The quantification of the security for costs 16 Counsel informed me, when I inquired what the defence and cross-claim might involve, that there was a question as to whether the bankrupts' signatures on the deed of agreement and mortgage were genuine, that may need to be investigated by an expert in due course. 17 When the hearing commenced this morning, I observed that the total amount of security of $143,691, exclusive of GST, which Mr Russell had sought in his affidavit was 60% of his estimate of the total costs and disbursements that Mr Piscopo was likely to incur of $239,485, including disbursements but excluding GST. The amount sought and the total estimate appeared to me to be very large and to involve the participation of a large number of solicitors in performing work at rates far greater than counsel's rates for tasks that appeared, primarily, to be the responsibility of counsel who would be presenting Mr Piscopo's case and leading evidence in support of it. 18 Mr Russell had based his estimates on differing hourly rates for work performed by a partner ($605 per hour), a senior associate ($490 per hour), an associate ($420 per hour) and a lawyer ($310 per hour). Counsel briefed in the matter was charging $3,200 per day and $400 per hour. As examples of what concerned me, Mr Russell estimated solicitor/client fees of: (a) $21,920 for considering the statement of claim and drafting and settling the defence and any cross-claim, comprising: Task(s) Partner Senior Associate Associate Lawyer Counsel (hourly rate) Total Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ $ Considering Statement of Claim and seeking further and better particulars (if necessary) 1 605 2 980 2 840 5 1,550 4 1,600 5,575 Conferring with Counsel 1 605 1 490 1 420 1 310 2 800 2,625 Drafting Defence and any Cross-Claim 1 605 3 1,470 5 2,100 10 3,100 9 3,600 10,875 Filing and serving Defence and any Cross-Claim 0 0 0 0 0 0 1 310 0 0 310 Correspondence with client and opposing solicitors regarding pleadings 1 605 1 490 1 420 2 620 1 400 2,535 Total 4 2,420 7 3,430 9 3,780 19 5,890 16 6,400 21,920

(b) $69,960 for preparation and conduct of an estimated two day final hearing, comprising: Task(s) Disburse-ments Partner Senior Associate Lawyer Counsel (daily rate) Total Associate $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ $ Drafting submissions 2 1,210 3 1,470 4 1,680 8 2,480 1 3,200 10,040 Counsel preparation 0 0 0 0 0 0 0 0 2 6,400 6,400 Solicitor preparation 4 2,420 8 3,920 12 5,040 18 5,580 0 0 16,960 Correspondence with client and opposing solicitors regarding hearing 2 1,210 3 1,470 4 1,680 6 1,860 0 0 6,220 Attendance at hearing 8 4,840 12 5,880 14 5,880 14 4,340 2 6,400 27,340 Transcript fees 3,000 0 0 0 0 0 0 0 0 0 0 3,000 Total 3,000 16 9,680 26 12,740 34 14,280 46 14,260 5 16,000 69,960

19 That last step included nearly $17,000 for preparation by the solicitors for the estimated two day hearing, while the costs of counsel's preparation was only $6,400, and the attendance of all four solicitors for varying times at the hearing at a cost of nearly $21,000, when counsel, who was to present the case, would be charging a mere $6,400. 20 In my opinion, first, this division of work and costs does not comply with the requirements of Part VB of the Federal Court of Australia Act 1976 (Cth) and the overarching purpose of the civil practice and procedure rules. Secondly, it reflected, on its face, an inefficient and inappropriate way of dealing with the preparation for, and conduct of the hearing of, a case that, in effect, was to be, and should have been, substantively prepared and argued at all stages by counsel. Counsel's fees were less on an hourly basis than all of the solicitors' fees, apart from those of the junior lawyer, that were to be charged on the solicitor/client costs. Counsel was the one who should have had the primary role in preparing and drafting the pleadings and submissions, after having received instructions about the facts, rather than having pleadings, or submissions, drafted by not just one, but four, solicitors. 21 Given the obvious efficiency (and proper role) of having counsel draft and settle pleadings and submissions, as well as leading evidence in chief, and significant savings in fees from his doing so, there is no apparent reason why much of that work was planned to be done by not one but, in various unexplained ways, four solicitors as well as counsel. 22 One of the significant concerns in our society is the cost of access to justice. It is not surprising that individuals and small businesses would find it difficult to obtain access to justice where four lawyers at a solicitor's firm were each charging different, but substantial, amounts for doing what must involve repetitive work of looking at one another's drafts, documents or other communications, all of which, ultimately, would be, and were intended to be (and properly should have been), drafted and settled by counsel. There is no obvious reason why, having regard to solicitors' fiduciary duties to their clients to ensure that their cases are prepared as efficiently, but as economically and reasonably, as possible, this kind of charging practice is appropriate. 23 I am not intending to direct criticism in these reasons towards the particular solicitor, Mr Russell. That is because I am not suggesting that this is an isolated situation. To the contrary, it appears to have become a more general model for solicitors to do work that the purpose of having a separate bar was originally intended to ensure be done by the specialised and most cost-efficient advocate, namely counsel. All too often, in looking at security for costs applications, the amounts estimated to be incurred by solicitors in preparing cases, as opposed to the amounts estimated to be incurred by counsel, involve a skewing of work towards the solicitors' efforts that does not seem to be efficient or appropriate in the preparation or presentation of the particular case. Where counsel has to make the forensic decisions as to how the material facts should be pleaded, what pleadings are maintainable, what evidence is to be led and what submissions should be drafted, it is of vital importance that counsel undertake the burden of doing that work themselves and not have it duplicated unnecessarily by the involvement in preparing drafts of one, let alone multiple, solicitors. 24 Moreover, if solicitors do the significant amounts of drafting work involved in the estimates, it becomes much more difficult for counsel to delete or jettison that material, if counsel decides that some, or often much, of it is irrelevant or unnecessary. After all, by then the solicitor's client has been charged for what is very often forensically useless and would never have been included in the drafting process, had that process been in the control of the advocate from the beginning, as used to be the position. 25 Indeed, the experience of judges in the hearing of cases, including frequently in appeals, is that counsel often departs significantly from the written submissions that have been ordered to be filed, when he or she informs the Court about the different way in which he or she is going to present the case. At the conclusion of counsel's address, he or she then relies, in almost a throwaway line, on everything in the written submissions, without developing them. 26 This is not the way that litigation can, or should, be conducted, having regard to the solicitors' and counsel's fiduciary duties to their client, their obligations to the Court and their client under Pt VB of the Federal Court Act and their ethical obligations otherwise arising from their being officers of the Court. 27 Litigation should be conducted as quickly, inexpensively and as efficiently as possible. That is because the allocation of what is substantively the work necessary to draft pleadings, and present evidence and argument in proceedings is essentially that of the advocate who appears at the trial or other hearing. However, that is not how larger law firms tend to approach modern litigation, as is exemplified in the estimates for this case. This approach appears to be treated by the profession as being one that somehow is justifiable. 28 In my opinion, it is time that the profession recognised that costs should be kept to a minimum. Having five lawyers looking at, for example, the drafting of a pleading or submissions is a matter that, in a case such as this, bespeaks a failure to address a client's best interests and the overarching purpose in Pt VB of the Federal Court Act in minimising costs, and involves a degree of waste and unnecessary duplication of effort that I cannot comprehend. 29 After I raised my concerns as to the way in which the estimates had been prepared, counsel for Mr Piscopo proposed a modification that resulted in a significant reduction of those amounts. That estimate accepted that most of the work would be (as, in my opinion, it should be) performed by one lawyer and counsel. The revised estimates also had regard to the fact (which it appeared Mr Russell had not anticipated) that I also indicated in the course of argument that I would direct that the witnesses' evidence in chief would be given orally, after the parties had exchanged outlines of the evidence anticipated to be given by each of the lay witnesses and that the outlines could not be used in cross-examination or departed from in chief without the leave of the Court.

Conclusion 30 In my opinion, the appropriate amount to be ordered by way of security is a total of $77,000 (about half of the original estimate). The security should be paid in stages. The steps to be undertaken in the proceedings are as follows:

1. If the applicant defaults in making any payment pursuant to order 2, the proceeding be stayed until further order.
2. The applicant pay security at the times and in the respective sums below into Court or an agreed interest-bearing account: (a) on or before 7 April 2017, $10,000, in respect of the pleadings stage of the proceeding; (b) on or before 9 May 2017, $10,000, in respect of discovery and work associated with subpoenas or notices to produce at this stage of the proceeding; (c) on or before 3 July 2017, $24,000, in respect of the preparation of evidence and mediation phases of the proceeding; and (d) on or before 1 September 2017, $33,000, in respect of the final hearing.
3. The applicant file and serve its statement of claim on or before 28 March 2017.
4. The respondent file and serve his defence and any cross-claim on or before 26 April 2017.
5. The applicant file and serve any reply and any defence to the cross-claim on or before 9 May 2017.
6. The parties give general discovery on or before 30 May 2017.
7. The proceeding be referred to mediation by a mediator agreed between the parties on or before 30 May 2017 and, in default of agreement, by the Registrar, and such mediation occur on or before 30 June 2017.
8. On or before 21 July 2017, the parties exchange outlines of lay evidence of their witnesses-in-chief, and the respondent file and serve any expert evidence on which he proposes to rely.
9. On or before 18 August 2017, the parties exchange outlines of lay evidence in response, and the applicant file and serve any expert evidence on which it proposes to rely.
10. On or before 15 September 2017, the experts confer in the absence of lawyers and parties and prepare a joint report outlining the areas on which they agree and the areas on which they disagree, giving brief reasons for any disagreement, and the parties file the expert report.
11. The proceeding be fixed for hearing on 27 November 2017. 31 Having regard to the outcome of the proceedings on the application of security, in my opinion the proper order is that the parties' costs of the application for security be the parties' costs in the proceedings. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.