The trial in this matter took place over five days between 22 and 29 August. At the end of the argument on 29 August, I delivered ex tempore reasons. The proceedings were adjourned to allow the parties to agree on orders giving effect to my judgment. Following further argument, those orders were made on 14 September. Those orders disposed of the proceedings, except the question of costs, which the parties agreed should be dealt with on the papers. That question is the subject of this judgment.
On 14 September I issued a formal judgment which had been revised from the transcript of 29 August and also included the final orders made on that date: Business Finance Pty Ltd v Casula Projects Pty Ltd [2022] NSWSC 1156. This judgment assumes familiarity with that one, the paragraphs of which are referred to in this judgment as "J1".
[2]
Background, procedural history and decision
The first plaintiff ("BF") formerly held a registered mortgage over a townhouse owned by the defendant ("CPPL") at Surfers Paradise in Queensland. The mortgage was security for a loan made by BF to CPPL. At the time, BF and CPPL were both controlled by Mr Frankie McDad. He arranged for the mortgage to be discharged, because the loan had purportedly been repaid.
A receiver was subsequently appointed to BF, who caused it to bring proceedings against CPPL. The contention was that the loan had not been repaid (or at least fully repaid). The receiver was joined as the second plaintiff, but this made no practical difference to the claims and issues in the proceedings. As I did in my earlier judgment, I will, in this judgment, refer to BF as if it were the sole plaintiff.
The initial mortgage loan from BF to CPPL was made in September 2017. The loan amount was $1.23 million. The loan period was short and the interest rate was high; the loan was repayable by 31 March 2018, the default interest rate was 24% and even the non-default rate was 12%.
At the time the relevant transactions took place, Mr McDad operated other companies, apart from BF, which were involved in lending. One of these was Private Fund Pty Limited ("PF").
In October 2017, Mr McDad organised the transfer from PF to BF of the sum of $600,000. A further $800,000 was paid in November 2017. Mr McDad instructed BF's solicitors that in making these payments, PF was refinancing CPPL's borrowing under the mortgage. On this basis, CPPL's debt to BF had been repaid, and the solicitors arranged the discharge of the mortgage at Mr McDad's request.
Initially, there was a personal claim for damages or compensation in these proceedings against Mr McDad and he was named as the second defendant. But BF discontinued its claim against Mr McDad in June this year and agreed to pay Mr McDad's costs of the proceedings (he was represented separately from CPPL). The statement of claim was amended to reflect this soon afterwards.
BF's first contention in the proceedings was that in fact the $600,000 payment was an advance by PF to BF to enable BF to meet its obligations to its creditors under a syndicated loan facility. For this reason, so BF contended, the mortgage should not have been discharged because there was still an amount actually owing under it from CPPL to BF.
There were further transactions relevant, or potentially relevant, to the state of the account between BF and CPPL. In May 2018, BF paid the sum of $800,000 to PF. It was contended on behalf of BF that this was a repayment of the $800,000 paid in November the previous year, and should therefore be debited to CPPL. This was consistent with BF's accounts, which recorded a balance owing from CPPL of $1,199,900 as at 31 May 2018.
The other issue concerned payments totalling $1,199,900 made by PF to BF in March 2019. These were recorded as a repayment of principal on the loan to CPPL. But the contention for BF was that they were not a loan repayment and should not be credited to CPPL on the loan account.
Mr McDad was called as a witness and cross-examined at length. His credit was vigorously attacked by counsel for BF. His wife, Ms Yuk Mei Regina Ko, was also called as a witness and cross-examined. Various witnesses who had given affidavits for BF were cross-examined by counsel for CPPL. But in the course of final argument there was a dramatic reduction in the area of dispute and many of the issues which had been raised, including most of the issues about credit, fell away.
In final submissions, counsel for CPPL abandoned the contention that the $600,000 paid from PF to BF in October 2017 had been made in reduction of CPPL's loan account with BF. It followed that on any view the mortgage should not have been discharged in November 2017. The question for the Court was whether the debt had, as a result of the subsequent transactions, been discharged, so that there would be no point now in reinstating the mortgage.
Counsel for CPPL maintained, but only faintly, that the $800,000 paid from BF to PF in May 2018 was not a reversal of an earlier repayment on the CPPL loan account. I considered, however, that the evidence established that it was.
For their part, counsel for BF maintained that the $1,199,900 was not properly brought to account as a repayment. It was clear from the evidence that this payment had been intended by Mr McDad and Ms Ko, who acted at his direction, as a repayment. Counsel in the course of final submissions developed an argument that there was some proprietary interest arising from a Quistclose trust or a Black v Freedman trust which prevented the funds being attributed to the account. In the end, counsel did not press that argument, but did not concede that the amount should be credited. However, I considered that it should be.
The result of all of this was that the sum recorded in the books of BF as the loan principal at 31 May 2018 ($1,199,900) had been repaid in March 2019. But this did not fully take account of CPPL's interest liability. The result of the high interest rate (which compounded monthly) was that the amount outstanding at the time of the trial stood at $500,000 at least. Accordingly, I concluded that the mortgage should be reinstated.
Initially, counsel for BF had sought not only an order reinstating the mortgage, but also an order for judgment for the amount claimed on the loan account. But as a result of my findings, the amount due had to be recalculated. In any event, there was no need for the Court to determine the final amount owing. Once the mortgage had been reinstated this could be worked out extra-curially under the usual mortgage accounting procedures.
All that the Court therefore needed to do was to decree the reinstatement of the mortgage and make declarations recording the Court's conclusions on the disputed transactions. These orders were made on 14 September: see J1 [48(1)-(4)].
[3]
Costs
For BF, it was contended that it should receive an order for its costs of the proceedings, awarded on an indemnity basis to reflect BF's status as mortgagee (at least in equity). BF also sought a special order specifying that its costs carry interest at the interest rate under the mortgage.
In his initial written submissions on costs, counsel for CPPL contended that the basis on which costs were to be assessed, and the claim for interest on costs at the mortgage rate, should not be dealt with at this point. Instead, counsel submitted, those questions should be left to the process of extra-curial accounting to take place under the mortgage.
But as I explain in more detail below, strictly speaking these proceedings were not proceedings for an account under a mortgage. Rather, they were proceedings in the nature of specific performance for reinstatement of a mortgage to the register. As such, they concerned a discrete claim which is independent of the quantification of BF's ultimate entitlement under the mortgage. That claim has been entirely disposed of by the Court and it is not easy to see how the Court could in effect reserve the costs of the claim when the accounting process under the mortgage will take place extra-curially. I think I must deal with the costs of the proceedings now.
Counsel for CPPL advanced three main contentions. First, counsel for CPPL contended that BF had not been wholly successful in the proceedings. Both parties had achieved a measure of success and so, it was said, there should be no order as to costs. Secondly, if there was to be an order made in BF's favour, then it should not be on an indemnity basis. Thirdly, counsel disputed the award of interest on costs at the mortgage rate.
[4]
Costs award in favour of plaintiffs
Counsel for BF acknowledged that it did not succeed in obtaining judgment for the full amount recorded as outstanding on 31 May 2018 ($1,199,900), together with interest on that sum, as had been sought. That would have resulted in judgment sum of more than $3 million. In fact, BF did not obtain judgment at all, although, as already stated, it is common ground that the amount outstanding under the reinstated mortgage will exceed $500,000. Counsel for BF contended, however, that BF had been successful overall in the proceedings and that the costs of the proceedings as a whole should follow the event.
Counsel for CPPL observed that the evidence in the case had been very extensive. The pleadings had not reached their final form until after the evidence had already been filed on both sides. BF had eventually been successful, in counsel's characterisation, on a limited basis.
Counsel pointed out that BF had ultimately failed in its contention that the payments to BF in March 2019 totalling $1,199,900 should not be credited to the CPPL loan account. Counsel also submitted that, at least up until the second day of the hearing, BF had resisted the crediting of the $800,000 paid in November 2017 to the CPPL loan account. BF had thus failed on these issues. In an earlier written submission, counsel for CPPL identified two further issues on which BF had allegedly failed: these were an issue described as the "sham issue" and also the trust contentions; I assume that these "issues" are subsumed within the "issue" concerning the $1,199,900 paid in March 2019, and I will not consider them separately.
I have set out my views in three recent cases on the costs principles which apply where the parties experience mixed success on claims and issues raised in the proceedings: Southern Oil Refining Pty Ltd v Hydrodec Australia Pty Ltd (No 2) [2021] NSWSC 336; Trentelman v The Owners - Strata Plan 76700 (No 3); The Owners - Strata Plan 76700 v Trentelman (No 3) [2021] NSWSC 578; and Akierman Holdings Pty Limited v Akerman (No 3); In the matter of Akierman Holdings Pty Limited (No 2) [2021] NSWSC 869. I propose to take the same approach here as I did in those cases. For present purposes, that means:
1. the rule that "costs follow the event" is to be applied distributively among different claims in the proceedings;
2. but where there is mixed success on factual or legal issues that arise under a particular claim, a differential or discounted costs order should not be made with respect to the costs of the issues on which the unsuccessful party succeeded unless such issues are "clearly dominant or severable".
Applying that approach, it is plain that BF has been wholly successful on its claim for an order in the nature of specific performance reinstating the mortgage over the Surfers Paradise property. BF has not obtained a judgment for the outstanding mortgage debt, but the result of its success is that it has no need to do so.
In my view, in these circumstances the questions which were debated about whether the March 2019 payments should be credited to CPPL's account should be seen as subordinate issues, rather than separate claims, for the purposes of applying the general rule that costs follow the event. I do not consider that those issues can be regarded as "clearly dominant or severable". In order to obtain the relief in the nature of specific performance which BF sought, it was necessary, not only to demonstrate that the discharge of the mortgage had been wrongful when it occurred, but also to demonstrate that there remained at trial a significant debt (even if unquantified) outstanding, so as to make reinstatement of the mortgage worthwhile. Although CPPL succeeded in establishing that it should be credited with the March 2019 payments, BF succeeded overall.
Counsel for BF submitted that, when the pleadings were properly understood, it had accepted well before the second day of the hearing that the November 2017 payment of $800,000 was to be credited to CPPL. I do not find it necessary to go into this submission. The issue about crediting the November 2017 payment was a subordinate one, just as the issue about crediting the March 2019 payment was.
It is true, as counsel for CPPL pointed out, that in the end the case was decided on a narrow factual and legal basis. But that observation does not assist CPPL, as the dramatic narrowing in the issues at trial was largely a result of CPPL giving away factual contentions which by that stage appeared virtually untenable anyway. So far as I can see, the length of the hearing largely reflects the way in which CPPL chose to run the case.
In the end, in my view, BF has been successful in the proceedings and should receive an order for its costs. The proper order is an order that BF's costs of its claim against CPPL be paid by CPPL. This will ensure that costs solely referable to the personal claims against Mr McDad cannot be recovered: see Dimos v Willetts (2000) 2 VR 170 at [45]. But I do not think that there should be any order further discounting the costs recoverable from CPPL.
[5]
Basis of assessment
Both parties approached this issue by reference to the principles expressed by Beazley JA, speaking for the Court of Appeal, in Kyabram Property Investments Pty Limited v Murray [2005] NSWCA 87 at [11]-[14]. Her Honour accepted that, in a case where parties to proceedings have contractual rights to recover their costs on an indemnity basis (or on more than the ordinary basis), the Court may exercise its discretion so as to award costs on that contractual basis. But, being discretionary, such an award may, depending on the circumstances, be declined.
Counsel for BF submitted that BF had a contractual entitlement to costs which justified an award of indemnity costs in the present case. Counsel noted that the terms of the September 2017 mortgage included within the secured monies for the purposes of the mortgage any "Costs and Expenses" which was defined as:
(a) any costs, expenses, fees, charges, disbursements including all Legal Fees incurred by the Lender arising from or in connection with:
…
(ii) the exercise of any rights or powers under this Mortgage, including but not limited to the taking of any Recovery Action;
…
"Legal Fees" was defined as:
all solicitor's costs, barrister's fees, and any disbursements on a full indemnity or solicitor and own client basis whichever basis yields the higher amount;
"Recovery Action" was defined as:
any step taken by the Lender, or by any Receiver appointed by the Lender, to exercise any rights or powers under this Memorandum or under this Mortgage, including but not limited to any step taken in any Court or Tribunal;
Counsel for CPPL contended to the contrary. Counsel repeated that significant costs had been incurred as a result of issues on which BF had failed or which had not needed to be decided. Counsel also pointed out that the claim for costs on a contractual basis had not been pleaded when it should have been (Kyabram at [15]-[16]).
In reply, counsel for BF relied on cases concerning the costs of mortgage accounting proceedings. In such proceedings, the mortgagee will be generally entitled to costs except where a claim is raised unreasonably (Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27 at [61]; and see Uniform Civil Procedure Rules 2005, r 42.25). Counsel acknowledged that the claim for indemnity costs on a contractual basis had not been pleaded, but submitted that failure to plead the claim made no practical difference.
In my view, there is a fundamental difficulty with BF's application for indemnity costs on a contractual basis in these proceedings. The proceedings were not proceedings for the taking of an account under an existing mortgage. They were effectively proceedings in the nature of specific performance, requiring the defendant to execute and register a mortgage instrument. Although the terms of that instrument are no doubt the same, or virtually the same, as the mortgage granted in 2017, it is a different instrument. The eventual taking of mortgage accounts will take place extra-curially under that instrument.
Seen in this way, I do not think the costs of the proceedings are really costs of enforcing the reconstituted mortgage at all. I see no reasons why the costs of BF's claim should be dealt with any differently, as a matter of the Court's discretion, from any other claim for specific performance. A successful claim should, in the usual case, result in a costs order on the ordinary basis.
If I am wrong in this view, I would nevertheless refuse the application for indemnity costs on discretionary grounds. It is up to BF to persuade the Court to exercise the discretion in its favour. Failure to plead the claim is well established as a factor militating against making the order. The idea is that a claim for indemnity costs based on a contractual right is effectively a claim for substantive relief. If it is not pleaded it is not part of the case: Kyabram at [15]-[17]. I do not think that merely asserting that failure to plead the claim has made no difference is a sufficient answer. That could be asserted in virtually every case.
[6]
Interest on costs
For substantially the same reasons, I decline to award interest at the rates specified in the 2017 mortgage on the costs incurred by BF in the proceedings.
[7]
Orders
The orders of the Court are:
1. Order that the defendant pay the plaintiffs' costs of the proceedings against it, on the ordinary basis.
[8]
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Decision last updated: 24 November 2022