By Amended Notice of Motion filed in court on 7 November 2019, the first and second defendants, and a company controlled by the first defendant joined to the motion as an applicant, Langridge Property Developments Pty Limited, seek the following relief:
1. An order under r 42.21(1)(f) of the Uniform Civil Procedure Rules and/or s 133(5) of the Corporations Act 2001 (Cth) and/or under the inherent jurisdiction of the Court that the plaintiff provides security for costs in an amount that the Court deems fit.
2. Deleted.
3. An order that the respondent pay the applicant the amount (together with any interest accrued thereon) held by the respondent pursuant to the agreement noted in paragraph 3 of the respondent's letter to the plaintiff dated 21 December 2016.
4. Costs.
I should say in relation to prayer 3, that the applicant is the company and the respondent is a firm of solicitors holding certain monies on trust. I will explain the relevance of this in more detail below.
[2]
The nature of the dispute.
The plaintiff is suing the first and second defendants for debt recovery and possession of land. It alleges that the debt was created by a deed of loan dated 5 July 2016. The plaintiff claims to be a secured creditor in that the defendants executed a mortgage in registrable form over their home in favour of the plaintiff. The mortgage is not registered under the Real Property Act 1900 (NSW) and the plaintiff is a second or subsequent (unregistered) mortgagee. The third defendant is the registered first mortgagee of that property. It did not appear and has taken no active part in the hearing of the application before me.
It is convenient to say now that the legal practice holding the monies, the subject of prayer 3 did not appear, although I am satisfied from paragraphs 12 to 14 of the First Defendant's affidavit of 6 September 2019 read without objection that the motion has been served and the legal practice has had sufficient notice of the hearing to appear to oppose the application had it so desired.
For present purposes it is sufficient to describe the nature of the dispute between the parties by saying that at the time the Deed of Loan was executed on 5 July 2016, the first and second defendants were in a very hard place financially. They were in breach of their loan agreement with the third defendant who had commenced proceedings in this Court and obtained judgment for possession. A writ had issued which was to be executed by the sheriff the following day, viz 6 July 2016.
According to the terms of the deed the amount of the loan was in the sum of $132,136.30 for a period of two months only until 4 September 2016. Interest during the term of the loan was pre-paid and in default of repayment of the principal sum on the repayment date of 4 September 2016, the outstanding balance would carry interest at the rate of 15 percent per month, compounded daily.
By reference to the Amended Statement of Claim filed on 29 March 2019, the amount of the principal sum still outstanding is $45,991.63. No specific amount is claimed for interest, but rough mental arithmetic suggests that the plaintiff claims something in the order of $250,000 under that head. Judgment for possession and orders for judicial sale are also sought.
To maintain the chronology of relevant events it is convenient to narrate the facts relevant to prayer 3. The first defendant at all material times has been the sole director and shareholder of Langridge Property Investments Pty Ltd ("LPI"). In or about September 2016 LPI entered into a contract for the sale of land it owned at Brookvale. The contract of sale was expected to be completed by 21 December 2016. On 19 December 2016, just before the date for settlement, the plaintiff lodged a caveat over the Brookvale property asserting a legal charge over that property securing the debt created by the Deed of Loan. The charge was said to have been created by a personal property services agreement dated 26 July 2016 bearing a specific registration number which is recorded in the caveat.
I infer from subsequent events that the first defendant must have assumed that he had granted such a charge because he agreed to pay-out the loan from the proceeds of sale of the Brookvale property, although he disputed the claimed payout figure of $166,373.
On the morning of 21 December 2016, the solicitor from the legal practice had a number of conversations with the plaintiffs' representative and the following offer was made and accepted:
In exchange for you providing a Withdrawal of Caveat … at settlement of this matter, we are instructed:
(1) To deposit the balance cheque from the proceeds of the sale of the above property in this firm's trust account and seek a special clearance of that cheque;
(2) Once the cheque referred to in paragraph (1) above is cleared, draw a trust cheque in favour of [the plaintiff] in the amount of $140,000; and
(3) Retain an amount of $26,000 in our trust account until the dispute as to the amount payable in repayment of the loan made to [the first and second defendants] is determined by agreement or by the Court.
To be clear the above figures are without any admissions as to liability … and [the first and second defendants and LPI] reserve their rights of in every respect (sic).
For reason not explained in the evidence, the transaction did not settle on 21 December 2016, but did so on 12 January 2017 when the agreement was performed by the legal practice retaining $26,000.
As it regarded the dispute about the repayment amount as not resolved, the plaintiff commenced these proceedings on 5 December 2017. The plaintiff apparently experienced difficulty in serving the Statement of Claim and orders for substituted service were made on 4 June 2018. On 1 August 2018 Darke J entered default judgment in favour of the plaintiff in the sum of $618,795.73 together with judgment for possession. A writ was subsequently issued.
I interpolate, given that the amount apparently in dispute as at December 2016 was $26,000, and even allowing for the high compound interest rate of 15 per cent per month on the outstanding principal sum, it is very difficult to understand how the amount of the default judgment was calculated by the plaintiff. I must say, and this involves no criticism whatsoever of Darke J, but on the evidence before me that figure could not possibly be correct on the facts now known to me.
Doubtless after receipt of the eviction notice from the Sheriff, the first and second defendants filed and served a Notice of Motion on 20 September 2018 seeking a stay of the writ of possession and setting aside the default judgment. On 24 September 2018, the plaintiff consented to the stay and a timetable for the exchange of evidence in relation to the application to set aside the default judgment was fixed.
On 31 January 2019, Lonergan J ordered disclosure by the plaintiff to the defendant in thirteen various categories. The first category required discovery of the personal property security agreement dated 21 July 2016.
In providing unverified discovery on 1 February 2019, the solicitors for the plaintiff said of the security agreement:
We are instructed that our client does not possess a Personal Property Security Agreement dated 26 July 2016. We are instructed that at the time of the loan, Mr Langridge agreed to provide a PPSA in relation to the Brookvale property which was owned by his company. This was proposed due to their (sic) being inadequate security over the property located at …… Manly New South Wales.
The Manly property is the first and second defendants' home.
On 18 March 2019 the judgments of 1 August 2018 were set aside by consent and the first and second defendants were ordered to pay the plaintiff's costs thrown away and its costs of the motion filed on 20 September 2018.
[3]
Pleadings
As I have said, the Amended Statement of Claim was filed on 29 March 2019. The Defence to the Amended Statement of Claim was filed on 29 April 2019. The grounds of defence largely reflect what is contained in the Cross Claim filed on 20 June 2019. Essentially the defendants say that the deed of loan did not accord with the loan previously agreed to, but was signed in circumstances of great urgency and the differences were not onserved. The facts in relation to the sale of the Brookvale property by LPI are pleaded in reduction of the debt claimed by the plaintiffs and it is asserted that the Deed of Loan should be set aside.
In the Statement of Cross-Claim, the defendants impugn the Deed of Loan and the mortgage relying upon misrepresentation; the facts in relation to the Brookvale sale are averred at paragraphs [22] to [29] of the Cross Claim; and relief is sought under the Contracts Review Act 1980 (NSW) and for unconscionability or misleading or deceptive conduct under s 12CB, 12BG and 12DA Australian Securities and Investment Commission Act 2001 (Cth). Finally, it is alleged that the default interest rate of 15 percent per month is a penalty and liable to be set aside as void and unenforceable. Perhaps because of an oversight no relief is sought in respect of the $26,000 held on trust by the legal practice.
The plaintiff filed its Defence to Cross Claim on 22 July 2019 and denies the first and second defendant's entitlement to the relief sought on any of the bases advanced in the cross-claim.
[4]
Evidence as to the financial position of the plaintiff
In his affidavit affirmed on 5 August 2019 the first defendant said he had carried out a company search on 29 April 2019, which disclosed that the plaintiff had a paid up capital of $5,000. In response to his query, the plaintiff's solicitors asserted that the company was "capable of bearing an adverse costs order" on 13 May 2019. No information about the company's financial position was provided. Further searches indicated that the plaintiff was not the registered proprietor of any property in New South Wales. Further company searches and land registry searches in July and August confirmed this information.
The defendants filed the notice of motion for security for costs on 5 August 2019. When the motion and evidence in support were served, a Notice to Produce was also served seeking taxation and financial records relating to the plaintiff. The only document produced (on 4 September 2019) is an unsigned "Management Report" dated 30 June 2019. That document is annexed to the affidavit of Ms Erin Felthouse affirmed on 6 November 2019. Ms Felthouse is the solicitor with carriage of the matter under the supervision of the solicitor for the plaintiff.
The management report has the appearance of financial records prepared by accountants. The accountants are not identified, and the author has not signed it. Directors' declarations are also unsigned. The report asserts a net operating profit of $563,090 for financial year ending 30 June 2019, up from $289,598 the previous year. In that previous year "interest expenses" were said to be $199,000.
The balance sheet calculates "total equity" as $1,491,115. Current year earnings are incorporated and it's difficult to gauge the liquidity of those "assets" in terms of ready availability to satisfy an adverse costs order. The plaintiff failed to produce any income tax returns or the monthly accounts required in the Notice to Produce. Moreover, it's not clear whether the "Management Report" is a document prepared in the ordinary course of business or was prepared for the purpose of satisfying the Notice to Produce, notwithstanding its apparent date.
In addition, Ms Felthouse, in her affidavit of 4 September 2019 and 6 November 2019 refers to the judgment entered by Kunc J in matter no. 2018/00117744. This judgment was entered on 14 December 2018. Monetary judgments, including interest under a deed of loan, total $1,578,461.48. This judgment debt relates to a loan in respect of a property at Keiraville. Orders for possession and judicial sale were also made. From Ms Felthouse's second affidavit that property has now sold for around $1.3m. There are other creditors including a substantial debt due to the first mortgagee. From the figures provided in Ms Felthouse's affidavit, after the costs of sale, the plaintiff could expect to receive something less than $300,000 towards satisfying the judgment. From the bar table, Mr Katsoulas of counsel, who appeared for the plaintiff, indicated that if an order for security were made, the security would be provided not by the plaintiff, but by an individual standing behind the plaintiff. I record that no undertaking was proffered by that person to indemnify the plaintiff in respect of any adverse costs order that may ultimately be made.
[5]
Applicable statutory provisions
So far as is material, UCPR 42.21 makes the following provision:
If, in any proceedings, it appears to the court on the application of a defendant:
…
(d) that 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,
…
the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendants costs of the proceedings and that the proceedings be stayed until the security is given.
S 1335(1) Corporations Act 2001 (Cth) makes a similar provision:
Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, 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, require sufficient security to be given for those costs and stay all proceedings until the security is given.
[6]
Issues
As the plaintiff is a secured creditor and, inter alia, sues on a deed of loan, admittedly signed by the defendants, it is likely that the dominant issue for trial relates to the matters impeaching the transaction raised in the defendant's defence, and importantly, cross-claim. As pointed out above, affirmative relief is sought, in the alternative, under various remedial statues and principles of the general law. The relief includes orders setting aside the deed of loan and mortgage, or declaring them void, and for compensation for any amounts the defendants have paid in excess of "their true liability" (defendant's supplementary written submissions, 08/11/19 [14]). This gives rise to an issue, admittedly raised with counsel by me, which counsel addressed in Supplementary Written Submissions about whether the defendants were in substance plaintiffs rather than defendants. As Beazley J (as she then was) said in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 198:
Security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate (citations omitted).
The Corporations Act speaks expressly of "a defendant". As I have said because the dominant issue is likely to be whether the defendants are entitled to the relief they seek, there was a question in my mind about whether an order for security would, in any event, be appropriate.
Mr Katsoulas of counsel for the plaintiff drew my attention to UCPR 42.21(1A)(e) establishing as a relevant consideration, "whether the plaintiff is effectively in the position of a defendant". He submitted this accurately summed up the plaintiff's position in the present case, emphasising the claims for damages and compensation advanced as the remedy for the alleged misleading and deceptive conduct relied upon by the defendants in the cross-claim. He submitted that the cross-claim is neither entirely defensive nor merely responsive. He relied upon Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311 at [20(g)] were Derham AsJ said:
The Court would ordinarily seek to avoid the situation where the claim is stayed because of the inability of the plaintiff to provide security while the defendant's cross-claim covering the same factual areas proceeds.
Having regard to the authorities referred to by Mr Carroll in his Supplementary Submissions, I am persuaded that the defendants should be treated in substance as defendants, rather than plaintiffs.
[7]
Decision on the first issue
As long ago as 1966 in Demag-Lauchhammer Mashineen Bau and Stablbau GmbH v John Holland (Constructions) Pty Ltd (1966) 2 NSWR 3 Macfarlan J decided that "the mere fact that the defendant brings a cross-action arising out of the same transaction does not debar him from taking advantage of the rule" for security for costs. His Honour held that where the total litigation concerns different aspects of the one transaction, an order for security for costs will be available "even though the claim of the defendant may well be dominant" (page 7).
In HP Mercantile Pty Ltd v Plevey [2014] NSWCA 374 at [13] - [14], the Court of Appeal held that costs incurred by the defendant in separate related proceedings were covered by the phrase "the defendant's costs of the proceedings" in UCPR 42.21(1). Meagher and Barrett JJA gave four reasons for this conclusion. First, had the claims in the separate proceedings been brought by cross-claim in the plaintiff's proceedings they "would likely be within the description "costs of the proceedings"". Secondly, the incorporation of the bases of the cross-claim in the defence to the plaintiff's proceedings meant the costs of prosecuting the defendant's claim, albeit in separate proceedings, fell within the description "defendant's costs". Thirdly, by reference to s 1335(1) Corporations Act, the expression, "the costs of the defendant if successful in his or her or its defence" was sufficiently broad to extend to separate proceedings "solely by way of defence to the claim to which it is defendant". And fourthly, the scope of the Court's inherent jurisdiction to make an order for security for costs was not constrained by the fact "that the relevant costs are incurred in prosecuting a claim brought in separate proceedings, but in defence to the plaintiff's claim, rather than in the proceedings in which that claim was made".
From this fourth consideration, it is obvious that in their Honours view, no serious question arises about the availability of an order for security for costs where the costs in question are the defendant's costs in prosecuting a cross claim in the proceedings brought by the plaintiff.
The decision of Fagan J in Capital Securities XV Pty Ltd v Calleja (No 3) NSWSC 1501 is an example of a case where security for costs was ordered notwithstanding that the dominant issue was whether the defendant's cross-claim would be successful.
Notwithstanding the dictum of Derham AJ, I am satisfied that the defendants are in substance in the position of defendants and the plaintiff likewise in the position of a plaintiff. For the reasons discussed in HP Mercantile, the existence of the cross-claim in the circumstances does not, as it were, disentitle the defendant from bringing the application.
[8]
The financial position of the plaintiff
The second issue relates to the financial position of the plaintiff. I have discussed the evidence as to the financial position of the plaintiff above (at [20] - [24]). That material satisfies me that there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so. It is impossible to place any reliance upon the unsigned and unadopted management report. As I have said, I am unable to place any confidence on the documents comprising that report to conclude that the plaintiff has access to reasonably readily available liquid funds. The consideration that the company on best estimate only stands to recoup something less than $300,000 from the judgment of over $1.5m entered on 14 December 2018, is also a matter of real concern. Moreover, the consideration that Mr Katsoulas indicated that in the event an order for security was made, the security would be provided not by the plaintiff but by an individual standing behind it, even though no undertaking was proffered, provides reason for me to believe, in conjunction with the other matters I have referred to, that the plaintiff would be unable to pay the costs of the defendant if ordered to do so.
I have not overlooked the factors set out in UCPR 42.21(1A). Of importance, I am not satisfied that the making of an order would stifle the proceedings, given it seems there is a backer who is prepared to support the plaintiff. I also observe that, as I will demonstrate in a moment, the likely amount of security sought is not very large, albeit important to the defendants.
Mr Katsoulas did argue that there had been an unexplained delay in making the application for security for costs. I am not satisfied that this is so. Rather, the apparent delay between the commencement of proceedings on 5 December 2017 and the lodging of the application on 5 August 2019 is to an extent adequately explained. The matter has to be assessed against the entry of the default judgment by Darke J on 1 August 2018. It is quite apparent from the consent orders made on 18 March 2019 setting aside that default judgment that the defendants had both an explanation for their failure to file a defence and a fairly arguable defence, notwithstanding the order that the defendants pay the plaintiff's costs thrown away by its failure to defend and the costs of the motion to set aside the judgment filed on 20 September 2018. The statement that it was not until the first defendant undertook a company search in relation to the plaintiff (probably on legal advice) that he realised there may be reason to believe that the plaintiff could not pay an adverse costs order is credible. One may be slow to conclude that a company able to competently carry on business as a secured lender is likely to have substantial asset backing. In the event this proved not to be the case. Moreover, the consideration that the plaintiff has not produced credible financial records in response to the Notice to Produce reinforces that view. Given the history of the proceedings, I am not of the view that there has been an unreasonable delay in bringing the application for security.
In the circumstances, I am satisfied that the defendant has satisfied the primary condition for making an order for security.
[9]
The amount of the security
Mr Carroll is appearing for the defendants on a direct briefing basis. There will be no solicitors costs incurred. A claim is made for both past and future costs. It seems to me that, especially given the costs order made against the defendants on 18 March 2019, it cannot be said that the application, so far as it concerns past costs anyway, has been brought promptly. This is usually a condition of an order extending to past costs: see Beazley J's first principle from KP Cable at p. 197. Moreover, I accept the argument that the costs previously incurred engaging solicitors before Mr Carroll came into the matter have not been shown to clearly relate solely to this litigation.
It seems to me, therefore, that the order so far as that relates to past costs should relate only to Mr Carroll's involvement and even then only after 18 March 2019 when the consent orders setting aside the default judgment were entered. These costs are evidenced at pages 35, 36, 37, 40 and 41 of the Court Book. The total estimate of fees, including tax invoices rendered since 3 April 2019 is $78,233. On the face of it, this does not appear unreasonable.
Mr Katsoulas has made various arguments in his original and supplementary submissions as to the approach that should be taken to assessing the amount of security. I am of the view that a broad brush approach is appropriate rather than descending into the detail of minutiae. He also submits that preparation for hearing and hearing fees ought to be deferred until the hearing is fixed. I understand the force of that submission. On the other hand, as I have said, the amounts claimed as security for costs in the particular circumstances of this case are not only reasonable, but somewhat modest. To avoid further unnecessary applications it seems better to assess total costs at once making conventional discounts and ordering security at this stage.
Mr Katsoulas also submitted that given the likely dominance of the cross-claim as an issue for determination at the hearing, costs should be apportioned by making a 50 percent discount on account of costs being incurred by the defendants in prosecuting their cross-claim. Thereafter there should be an allowance of 70 percent only of the remainder to take account of the difference between indemnity costs and costs recoverable on the ordinary basis. Mr Carroll argued that there is usually less of a discount in respect of counsel's fees than solicitors costs.
Taking all of these matters into account, in my judgment, it is appropriate to discount the estimated fees by a factor of 35 percent to take account of severable aspects of the cross-claim and some difference in reduction of gross fees to recoverable costs on the ordinary basis. Taking this approach I propose to make an order as security of costs in the sum of $50,000.00.
[10]
Prayer 3
Prayer 3 relates to the summary return of the sum of $26,000 held in the trust account of the legal practice which formerly acted for the defendants. The relevant facts have been summarised at [3] - [10] above. As I have pointed out the facts in relation to the Brookvale sale are averred at [22] - [29] of the Statement of Cross-Claim. Having said this, there is no discernible prayer for relief in the cross-claim referable to those pleadings. Moreover, LPI is not a party to the cross-claim. It has only been recently restored to the Register. It was not named as an additional applicant until the Amended Notice of Motion filed in court on the morning of the hearing before me.
It is also the case that the legal practice are not a party to the cross-claim, although they are named as a respondent to the Notice of Motion.
With respect, when I invited Mr Carroll to identify the source of the Court's power to make the orders sought in prayer 3, in a summary manner in proceedings supported only by a notice of motion, he was unable to clearly articulate and identify the source of power. I can well appreciate the pragmatism involved in seeking to proceed in this way given the relative modesty of the amount involved and the strong case that the plaintiff at no time had any caveatable interest in the Brookvale property. The defendants, it may be inferred, acted under some economic duress in order to attempt to preserve the settlement of the sale of the Brookvale property.
At the same time, as Mr Katsoulas submitted, it is clear that a contract was entered into. In consideration of providing a withdrawal of caveat to permit settlement to proceed, the sum of $26,000 was to be retained from the proceeds of the sale of the Brookvale property on trust "until the dispute as to the amount payable in repayment of the loan made (to the first and second defendants) is determined by agreement or by the court". Mr Katsoulas pointed out there has been neither agreement nor determination by the court. And in these circumstances, there is no demonstrated entitlement for the return to LPI of the monies held on trust.
I think there is force in Mr Katsoulas' submissions. Effectively what is sought, by procedurally inapt means, is summary judgment on LPI's claim to be entitled to the money. I am not persuaded that notwithstanding all that can be said in favour of the pragmatism which underscores Mr Carroll's argument that this procedural irregularity should be indulged.
I propose to refuse the relief sought in Prayer 3. However, notwithstanding the modesty of the sum, I will provide an opportunity for the amendment of the cross-claim to name LPI as a cross-claimant and the legal practice as a cross-defendant and to seek orders impugning the agreement of 21 December 2016.
[11]
Costs
As both sides of the record have enjoyed some measure of success, I propose that costs be costs in the cause.
[12]
Orders
My orders are:
1. Within 21 days the plaintiff or an acceptable person on its behalf, is to provide security for the costs of the defendants in the amount of $50,000, by cash deposit, bank guarantee or in such other form as may be acceptable to the Registrar.
2. In the event of security not being provided in accordance with Order 1:
1. The proceedings will be thereafter stayed unless and until such security is provided; and
2. The first and second defendants may apply at any time after 15 February 2020 for the proceedings to be permanently stayed or struck out.
1. Refuse the relief sought in Prayer 3 of the Amended Notice of Motion filed in Court on 7 November 2019.
2. Grant leave to the first and second defendants to file an Amended Statement of Cross-Claim within 21 days of the date hereof naming Langridge Property Developments Pty Ltd as a third cross-claimant and Diamond Conway Lawyers as a second cross-defendant, and seeking to set aside the agreement of 21 December 2016 requiring the retention of the sum of $26,000 from the net proceeds of sale of the Brookvale Property in the trust account of Diamond Conway Lawyers.
3. The costs of each party are costs in the cause.
[13]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 15 November 2019
Parties
Applicant/Plaintiff:
ASIL Foundation (Lending) Pty Ltd
Respondent/Defendant:
Langridge
Legislation Cited (6)
Australian Securities and Investment Commission Act 2001(Cth)