Benzlaw & Assoc P/L v Medi-Aid Centre Foundation Ltd & Ors

Calavitti Lillas for the second and third defendants

[1] These are applications for security for costs brought by all three defendants against the plaintiff and a cross application by the plaintiff against the second defendant also for security for costs in respect of a counterclaim by that defendant.

[2] The plaintiff owns an office building in Brisbane. It had borrowed money from the first defendant but was in default of its loan. The amount said to be owing by 3 December 2005 was $12,279,608.26. On 29 November 2005 the first defendant assigned its mortgage to the second defendant and on 27 January 2006 the second defendant exercised its power of sale under the mortgage and sold the property to the third defendant for $13.1 million. The third defendant is a company with the same directors and shareholders as the second defendant.

[3] Before that transfer was registered the plaintiff lodged a caveat. The plaintiff's action against the defendants claims that its true relationship with the first defendant was not that of borrower and lender. Rather it pleads that they were joint venturers in a project to redevelop the property and sell it pursuant to alleged oral agreements. The plaintiff alleges therefore that the face value of the debt owed under the mortgage was not in fact owed.

[4] The plaintiff's case against the second defendant is similar, alleging oral agreements by which the second defendant also entered into a joint venture agreement in respect of the property. The plaintiff also alleges that the second defendant took an assignment of the mortgage from the first defendant by misusing confidential information.

The applications for security for costs by the second and third defendants

[5] The plaintiff is a corporation and the evidence establishes that, apart from its interest in the property the subject of this litigation, it has no assets sufficient to meet a likely award of costs against it. Mr Coulsen, for the plaintiff, argued that there was considerable doubt whether the amount claimed to be owing under the mortgage was in fact due and payable and that the value of the property was such that there would be considerable equity in the property when compared to the debts owing on it.

[6] The assumptions behind that submission required me to form the view that the plaintiff would succeed in its claim very substantially and to conclude that the result of the litigation would be that the plaintiff would, at the end of the day, have some interest in the proceeds of the sale of the land sufficient to meet an order for costs. The latter assumption also required me to accept that the property was worth more than the price at which it sold to the third defendant, admittedly a company whose directors and shareholders were the same as those of the second defendant.

[7] I am not prepared to make those assumptions at this stage of the litigation, less so because it appears that the plaintiff has been funded by a company known as Business Bridging Finance Pty Ltd to bring its action, and there is no suggestion that that company or the people behind it are willing to bring their assets into play to assist the plaintiff to provide security.

[8] It was urged on me that the involvement of Business Bridging Finance could well have been simply that of a lender who did not have any interest in the outcome of these proceedings. When the nature of its involvement in the litigation was queried during argument, I gave the plaintiff an opportunity to produce the agreement between it and Business Bridging Finance. That was not done, which leads me to conclude more readily that I should infer that Business Bridging Finance probably has an interest in the outcome of the proceeding.

[9] It is both inappropriate and problematical for me to predict the likelihood of success of the plaintiff's claim at this stage of the proceedings. Much will depend on the resolution of questions of credit affecting the main potential witnesses. The case pleaded by the plaintiff is, however, relatively complex, factually controversial, likely to be amended and not obviously guaranteed to succeed.

[10] The plaintiff has been on notice since shortly after the commencement of the action that the first defendant was concerned about its capacity to meet a costs order. Business Bridging Finance's involvement in the case occurred shortly before the application was brought. In those circumstances it does not seem to me that the delay in bringing the application has been such as to preclude its success.

[11] The natural persons connected with the plaintiff have not offered personal guarantees in respect of the plaintiff's potential liability for costs. Nor is there a very persuasive case that the plaintiff's impecuniosity is attributable to the conduct of the defendants. It was in default in respect of the mortgage from an early period, before entering into the alleged joint venture with the first defendant.

[12] The plaintiff's submission that, in effect, it was in the position of a defendant was not persuasive. More realistically, in my view, it has mounted a substantial action seeking a variety of relief, including damages, of a type that puts it squarely into the position of a plaintiff.

[13] In those circumstances it seems to me that an order for security should be made against the plaintiff.

[14] The second and third defendants are represented independently of the first defendant. Each estimate by the two groups of defendants of the likely cost of taking the matter to trial is $100,000. Those estimates were attacked by the plaintiff as excessive, both in respect of the calculation of costs and the likely length of trial. The plaintiff accepted that the trial could last up to five days while the defendants estimate the trial would last in the region of seven days. Although the method of calculation of the likely costs was not as detailed as sometimes occurs on applications of this nature, the defendants' estimates of the length of the trial appeared to me to be realistic, as were the likely costs on a daily basis of the conduct of the trial. Those estimates also indicated that the likely costs to be incurred could be in the region of $100,000 up to the end of the first day of a trial and could be considerably in excess of that amount for each of the sets of parties should the matter proceed to a full hearing.

[15] It is sometimes the practice to limit orders for security for costs to the costs likely to be incurred up to and including the first day of hearing to take account of the possibilities of a negotiated settlement of the action before the hearing. Even if the figures here did not support such an approach, this seems to me to be a case where it is appropriate to be liberal and to order security in the amounts claimed, particularly because there may well be a litigation funder supporting the plaintiff: see Maronis Holdings Ltd v Nippon Credit Australia Ltd [2000] NSWSC 994 at [11]; Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 at [81] and Baygol Pty Ltd v Huntsman Chemical Co Australia Pty Ltd [2004] FCA 1248 at [37]- [39].

[16] Those authorities endorse the view that, where litigation is being conducted with the object of assisting the economic position of some persons who are not within the range of any order for costs which the court can make, it is not just that those persons should pursue their own interests without making some provision for the risk imposed on the defendants. As Tamberlin J said in Baygol Pty Ltd v Huntsman Chemical Co Australia Pty Ltd at [39]:

"I consider that weight should be given to the fact that the litigation is being funded as an investment, which, in my view, weighs on balance in favour of a more liberal provision, especially given the consequences of having inadequate security."

[17] Accordingly I propose to order security for costs in favour of each of the two sets of defendants in the sum of $100,000.

The plaintiff's application for security against the second defendant

[18] The application for security by the plaintiff against the second defendant is in respect of a counterclaim based on the amount said to remain owing on the mortgage. It seems to me to be one described legitimately as a defensive manoeuvre by parties who are in substance and in fact defendants as well as counterclaiming plaintiffs. As Lord Greene MR said in Naamlooze v The Bank of England [1948] 1 All ER 465, 468:

"... a defendant who is exercising the right of any defendant to defend himself against attack ought to be allowed to do so and not [be] prevented or hampered by being ordered to give security."

[19] Accordingly, it does not seem to me to be appropriate to order security be provided by the second defendant.

[20] I order that the plaintiff provide security for the first defendant's costs in the amount of $100,000 on or before 17 March 2007, and that it also provide security for the second and third defendants' costs also in the amount of $100,000 on or before 17 March 2007.

[21] The plaintiff's application for security for costs against the second defendant is dismissed.

[22] I order that the plaintiff pay the defendants' costs of and incidental to the defendants' applications, to be assessed.

[23] I further order that the plaintiff pay the second defendant its costs of and incidental to the plaintiff's application for security against the second defendant..