Capitalink Pty Ltd v Whitnall

District Court of NSW|2022-08-31

Background

By notice of motion filed on 15 June 2022, the defendant, who I will henceforth refer to as the applicant, applied for security for costs.
The proceeding commenced on 16 December 2021. The plaintiff (the respondent on the application) sought a monetary judgment in a sum of approximately $480,000 (not including pre-judgment interest). According to its statement of claim, the plaintiff is a trustee of an investment trust which owns real property in Queensland, on which development had been approved by Brisbane City Council in 2013. In December 2015, a third party, DDC, agreed with the respondent to construct works suitable for residential occupation as townhouses. The applicant was guarantor of DDC's obligations. The respondent alleges that DDC did not complete works in accordance with its obligations. This, the respondent claims, forced it to incur expenditure to complete the works. DDC went into external administration in March 2017 and was deregistered in September 2020. The respondent sues the applicant on the guarantee to recover damages for the costs incurred in completing the works.
By its Defence, filed on 1 March 2022, amongst other matters, the applicant disputes that works were incomplete. He further disputes that, properly construed, the agreement was such that he was a guarantor at all. He says that DDC's obligations were varied in a way that discharged any obligations he had as guarantor; and, alternatively, his obligations were discharged when the respondent terminated the agreement. He also raises, in the alternative, various bases for arguing that his liability is more limited than alleged.

Mr Siddle's first affidavit

Mr Siddle is the principal of the litigation group of the firm MacPherson Kelley Pty Ltd and has been since July 2012. He is experienced in civil litigation and familiar with the processes for the assessment and taxation of legal costs.
His first affidavit fell essentially into three parts: an estimate of the applicant's costs of the proceeding; an opinion as to the applicant's anticipated party and party costs (should the applicant succeed); and evidence indicating the applicant's concern about the respondent's capacity to meet an adverse costs order. I will deal with the third of these parts first.

Concern about the respondent's capacity to pay

The applicant adduced evidence that the respondent trustee company has only a paid-up capital of $1.00. A 'creditor watch' search of the company indicated that its credit score of 555 placed it as being at a higher credit risk than average Australian companies. It owns no real property in New South Wales and apparently has granted to another entity, LBT, security over all present and after property, without exception. Its only property in Queensland is the property the subject of this proceeding, and that is encumbered by two mortgages granted to LBT. There are close personal links between LBT and the respondent.
Apprehensive about the respondent's capacity to meet an adverse costs order, Mr Siddle exhibited correspondence sent to and received from the respondent's solicitors in March and April 2022 on that subject, designed, to put it crudely, to flush out further information about the respondent's financial position, which did not satisfy the applicant's concerns.

Estimated costs

In March 2022, the applicant used coercive process to obtain documents from both the respondent and Teak Projects Pty Ltd. The documents produced has led the applicant to form a view that it may need evidence of a quantity surveyor.
Mr Siddle also referred to the respondent's non-compliance with court directions to serve affidavit evidence to support its case.
These two matters, together, might be regarded as caveats on Mr Siddle's costs estimate. This was (at the time of the first affidavit) an estimate of $254,880 for the combination of solicitor fees, Junior Counsel's fees and other disbursements (including expert's fees). He identified the hourly rates of the practitioners: $625 per hour for himself, $550 for a Senior Associate and $350 for a solicitor. Junior Counsel's fees were $300 per hour for out of court work and $3,000 per day for hearing (both being rates exclusive of GST).
He identified, in what must be said to be generic terms, the scope of the work he believed would be undertaken: briefing counsel to advise and appear; preparing for & attending directions hearings and interlocutory motions, briefing a quantity surveyor, considering lay and expert evidence to be served by the respondent, preparing an application for discovery, preparation for hearing and appearing at the hearing. He estimated that the hearing would run for at least two days. It is to be acknowledged that some further specificity is supplied in a document titled 'Additional Task Allowance' in certain schedules.

Anticipated costs

Mr Siddle deposed to his experience that on a recovery of costs on assessment, the rate of recovery is 65-75% on solicitor's fees and up to 100% for Counsel's fees and other disbursements.
On the lower part of that range, and on the basis of his costs estimate, Mr Siddle anticipated that there would be recovery in the order of $195,093. On the higher end of the range, he anticipated that costs could be recovered in the order of $212,175, both figures being exclusive of GST. The figure at the mid-point was $203,634.
Mr Siddle deposed that since Mr Whitnall is not registered for GST, he was not qualified for claiming an input tax credit for GST charged on legal fees and would be entitled to recover GST should he obtain a costs order. This led Mr Siddle to calculate additional sums on the low and high range, and mid-point range referred to above.
The amount of security claimed in the motion is $223,997.40, representing the mid-point of the costs anticipated to be recovered with the adjustment (upwards) for GST.
I will defer reference to Mr Siddle's second affidavit until after I have summarised Mr Draybi's affidavit.

Mr Draybi's affidavit

In correspondence sent to Mr Siddle prior to the hearing of the motion, Mr Draybi conceded that the threshold question of power under r 42.21(1)(d) was met, subject to the efficacy of the security which the respondent was prepared to provide and without prejudice to its being able to rely upon other discretionary matters the respondent relied upon to defeat the application.

The proposed security offered

Mr Draybi deposed that the respondent was indemnified from the assets of the trust under the trust deed, including the value of the property which is the subject of the proceeding. He referred to an informal valuation supplied to him by his client which, as at the date of the affidavit (18 August 2022) was $6,400,000. After taking into account the estimated secured debt ($5,084,386) to the mortgagee, it appeared that there was equity over the property in the sum of approximately $1.335 million.
In late March 2022, Mr Draybi supplied an undertaking, signed by the plaintiff, to the effect that in the event an adverse costs order was made against it, it would exercise its right of indemnity from the assets of the trust.
Although it regarded the undertaking as sufficient to allay the applicant's concern, in July 2022, on the respondent's behalf, Mr Draybi offered that the respondent would enter into a Deed of Priority, inclusive of the mortgagee (LBT) given the defendant priority in respect of any adverse costs order. To be clear, this was the mortgagee's agreement to the applicant's interest being granted priority. A draft deed was supplied to the applicant's solicitor, but the applicant rejected it as inadequate: the applicant sought a charge and regarded the priority as illusory.
Mr Draybi then deposed that the draft Deed of Priority had been amended to accommodate the respondent receiving a charge. This led the applicant to point out the possibility that LBT could assign its rights under the mortgage. In response to that, Mr Draybi indicated that he was instructed that LBT had no intention to assign its right under the mortgage but was nevertheless prepared to have a covenant inserted into the Deed of Priority that it would not assign its rights under the mortgage pending the completion of the proceeding and satisfaction of any costs order against the respondent. That covenant appears in cl 4 of the proposed Deed of Priority annexed to Mr Draybi's affidavit.
I now set out the features of the last version of the draft proposed Deed of Priority (set out on pp 43-50 of Mr Draybi's affidavit (Exhibit 1)), whilst noting that, there was one change proposed by the respondent's Counsel in oral argument. The draft document repeatedly mis-spelt the applicant's name.
The features are:

Recitals D and E indicate (respectively) that as security for the 'Costs Order', the respondent agreed to grant the applicant the 'Withnall Charge' (sic) and to procure that LBT provide priority in respect of the Withnall Charge (sic) in favour of Withnall (sic) (pursuant to the terms of the Deed) and LBT and the applicant agreed to set out the priorities of their Encumbrances in accordance with the terms of the Deed.
The key definitions are as follows: * Withnall Charge (sic) means the charge granted by the respondent in favour of the applicant over the Property as security for the Costs Order; * Costs Order (as altered by Counsel for the respondent in oral argument) means any adverse costs order made in the applicant's favour in the proceeding should the respondent be unsuccessful, for an unlimited sum; * Encumbrances means the Withnall Charge (sic) and the LBT Mortgage and each any of them is an Encumbrance; * Property means the whole of land contained in Qld title reference 12720054 owned by the respondent. * Clause 3 provides that: 1. The order of priority in respect of the Encumbrances is as follows, to the extent they secure or purport to secure any Property, is: 1. first priority: the Withnall Charge (sic); and 2. second priority: the LBT mortgage for the LBT Debt. 1. The order of priority set out in clause 3(a) applies until: 1. all debt has been irrevocably and unconditionally paid or discharged in full; 2. this deed is terminated by agreement in writing between the Secured Parties; or 3. the Proceedings are determined or dismissed by agreement, without the ordering of the Costs Order. 1. LBT and Withnall (sic) agree to notify each other as soon as possible after its Debt has been irrevocably and unconditionally paid and/or discharged in full.
Clause 4 provides that: 1. LBT covenants with Capitalink and Withnall (sic) that it will not assign its debt unless: 1. the proceedings are finalised without the making of a costs order in favour of Withnall (sic); or 2. if there is a costs order made in favour of Whithnall (sic), that is satisfied so that Capitalink's obligation to pay any adverse costs order is discharged.

Estimate of costs

Mr Draybi criticised Mr Siddle's costs estimate as excessive and unreasonable.
He singled out for criticism virtually all of the items in Mr Siddle's schedule and prepared his own schedule, which was annexed to his affidavit. If Mr Draybi's schedule was accepted, then adopting the same fee rates for the legal practitioners which Mr Siddle had identified, would produce a total for professional fees in the realm of $112,050. This assumed a substantial reduction in time for each of the generic categories of work which Mr Siddle had identified.
Mr Draybi adopted the same assumption as to the range of percentage recovery on a party and party assessment. Taking into account his own schedule for disbursements (including a substantial reduction for the fees of an expert quantity surveyor), he regarded the likely recoverable sums on an assessment as being in a range between $86,937.50 and $100,312.50.

Mr Siddle's second affidavit (in reply)

In this affidavit, Mr Siddle acknowledged some errors in his Schedules and provided a correct version of them. His revised (upward) estimate of costs was $336,840 (excl of GST). This also led to his updating his calculations of anticipated costs on recovery, with a low range of $254,289 and a high range $277,875 (both excluding GST), of $266,082 (excl GST). He also revised the additional sum recoverable due to Mr Whitnall's status of not being registered for GST.
Mr Siddle took issue with Mr Draybi's estimate, and in particular the discounts the latter had calculated for Counsel's fees and disbursements generally and Mr Draybi's not taking into account the applicant's recovery of GST in any costs assessment.
Mr Siddle responded to further deductions that Mr Draybi had made, broadly for: 1. the time he would spend supervising work to be performed; 2. disallowing costs associated with the application for security; 3. duplication of work to be performed by a team of lawyers.
For completeness, before turning to the parties' submissions, I note that when this matter was before me for mention on the first date of the three weeks' sittings in the Court's civil jurisdiction in Parramatta in which I presided, being 15 August 2022, the applicant called on a notice to produce to Court (dated 23 June 2022). That notice, to put the matter generally, required production of a range of financial documentation relating to the position of the respondent, and the trust. The applicant suggests that the documentation would draw out whether there were other unregistered encumbrances or charges from other creditors.
When the notice was called on 15 August 2022, the response was no production of documents.

Parties' submissions

It is common ground that but for the efficacy of an alternative form of security it proposes, the threshold question, of jurisdiction or power to order security under r 42.21(1)(d) of the UCPR has been crossed.
It also appears to be common ground that so long as alternative security of a kind was provided to the applicant, that would be a significant discretionary reason to refuse the application for court-ordered security under r 42.21.
The real question is whether the alternative security proffered by the respondent is adequate.

The applicant's submissions

The applicant contends that it is not. His Counsel relied upon her written submissions (MFI 1) supplemented by oral argument. First, there was nothing to stop the respondent from making distributions from the trust to unitholders and create competing claims against the assets of the trust, such as granting further registered mortgages over the property, which would take priority over the proposed unregistered charge.
Secondly, the respondent's proposal does not deal with the contingency of the trustee being removed, and a new trustee being appointed: there would be nothing to stop the new trustee dissipating the assets of the trust without reference to the applicant's interest.
Thirdly, the offered security ignores LBT's existing and first-ranking security over the property the subject of the proceeding and the indications that the townhouses are being, and perhaps have already been, sold. In this regard, it will not be enough for the applicant to lodge a caveat; since that will not prevent another mortgage being registered.
Fourthly, there are practical difficulties that would lie ahead in enforcing its rights under the proposed alternative form of security, being an unregistered charge. The applicant would have to commence a proceeding for a judicial sale of the property (whatever that may comprise at the time of the proceeding), with a prospective liability for costs of such proceeding. That process would likely be problematic given the uncertain position of the mortgagee. The interests of other purchasers (perhaps pending completion of the sale of townhouses) may complicate matters. Further, if LBT breached the agreement as to priority and if the respondent sued it for damages, it was unknown what assets it could enforce a judgment against. If, ultimately, LBT went into external administration, there would be further difficulties in enforcing an unregistered charge.
Fifthly, the applicant criticised the sufficiency of the evidence regarding the value of the assets against which the respondent would exercise its entitlement to indemnity. The estimated valuation for one of the townhouses and development approval for other townhouses were unverified. The state of the development has not been made apparent. There are no independent figures to indicate the balance on the loan to LBT or the current interest rate. Accepting on the faith what has been proven, regarding the respondent's equity in the development, there is no assurance that this is likely to remain.
Sixthly, in answer to a point raised by the respondent in its submissions (at paragraph 24), the applicant says he derives little comfort from the representation that there is no other registered or unregistered interest in the land. The applicant says that the representation is not substantiated by documents which were within the respondent's capacity to produce; which omission has not been explained.
Counsel for the applicant submitted that when regard is had to these difficulties, or problems standing in the way of his likely capacity to enforce the security offered, the Court should take into account the fact that the respondent has not said that it is unable to raise a bank guarantee, or an inability to raise cash as the ordinary, or conventional form for security and has not argued that its ability to continue the proceeding would be stultified if cash security was ordered.
As to other discretionary matters, the respondent has not cited any matters, other than the adequacy of the proposed alternative for security, that would tell against the Court making an award.
On quantum, the applicant's Counsel identified (at paragraph 14 of her submissions, MFI 1) the issues of fact and law which would require separate preparation. In relation to the issue of incomplete works, this would require expert evidence.
Counsel emphasised points clearly made by Mr Siddle in his second affidavit. This included that acceptance of the respondent's costs estimate would significantly underestimate the time that a supervising partner would and should be able to give; that there was no reason why, in the circumstances, some allowance for the estimate should be made for past costs; especially those incurred when the issue of security was first foreshadowed (in March 2022); it was not right to reduce the time spent by the most junior lawyer whilst simultaneously downgrading the time spent by the Senior Associate and supervising partner. Having regard to issues that the applicant identified, the applicant's estimates for reply evidence and discovery were reasonable.
In anticipation of a point raised by the respondent, Counsel for the applicant referred me to a decision of Parker J in Les & Zelda Investments Pty Ltd v Whitehaven Coal Ltd [2020] NSWSC 1091 ("Les & Zelda Investments") as authority for the proposition that once an estimate has been given as to what was likely to be recoverable, there would be little need, or occasion, for further discounting, to deal with the possibility of a settlement or other 'contingency' which might reduce the scope of the work the subject of the order for security.
The balance of Counsel's submissions centred upon the proposition that the Court should prefer Mr Siddle's opinions over Mr Draybi's opinion on line by line features of the former's revised schedule. In particular, it was unreasonable to take a view that the Principal Lawyer would, in effect, be substantially shut out in terms of the work that an assessor might think was reasonable to be performed.
In oral argument, Counsel for the applicant submitted that the Court could reasonably proceed on the basis that there would be little or no duplication in the time spent, say, preparing the Defence and inspecting documents, or between the time spent preparing for the mediation as distinct from the time spent preparing for the hearing (proper).

The respondent's submissions

The respondent relied upon written submissions (MFI 2), supplemented by oral argument. Before I turn to those, however, it is pertinent to note two further undertakings made by the respondent, through its Counsel, in oral argument. The first of those was noted earlier when I addressed the draft Deed of Priority. These were: 1. notwithstanding the definition of 'Costs Order' in the last iteration of the deed of priority (which featured reference to an ascertained amount for the adverse costs order), the plaintiff undertook that the Charge would secure a costs order which was unlimited in amount; 2. if it became necessary, the respondent (as registered owner) would, for the purpose of s 126(1)(b) of the Land Title Act 1994 (Qld) provide consent, at the time the applicant lodged a caveat, to obviate the requirement for the applicant to commence a proceeding (under s 126(4)(a)) to extend the protection obtained from a caveat.
The respondent argued that any order under r 42.21 of the UCPR is not intended to ensure that defendants to actions brought by corporate plaintiffs receive an indemnity or perfect security. Any order should be fashioned in a way which is least disadvantageous to the plaintiff. Consistently with this, if alternative arrangements for the provision of security can be provided other than the payment of money, such as a charge, then the Court would lean towards the alternative.
The respondent acknowledged that where the plaintiff is a trustee company, its right to indemnity against trust assets is generally not an adequate alternative. That is unless the plaintiff can show that it will have recourse to property or assets it holds on trust, but even then, the Court will bear in mind the difficulty which a successful defendant may encounter in attempting to execute in respect of an order for costs: Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 ("Street") per Brereton J (as his Honour then was) at [9]. Here, the only asset that the respondent relies upon is its indemnity, but it has secured that indemnity by virtue of a charge over the property and ensured that the charge is adequate by obtaining priority as to an unlimited quantum, over the mortgagee.
Here, to secure its right of indemnity (for the applicant's benefit), the respondent had: offered the applicant an equitable charge over real property; procured the (sole) mortgagee's agreement to give priority to the applicant over its own registered interest; had represented that there was no other claimant that had or will have an interest over its real property; and to the extent that the last matter altered, cooperate with the applicant (by providing consent) to preserve a caveat in place. The last feature meant that leaving aside whatever other rights it had with the caveat, the applicant could bring a new application for security based upon a material change of circumstance (if the respondent did not otherwise agree, in the meantime, to provide additional security).
Counsel for the respondent argued that the applicant's objections to the proposed alternative security comprised too many imponderables or contingencies. Some of these were not real concerns. Thus, in the event the unitholders did remove the trustee, a substitution order would not likely be made by the Court if, as was apparent, there was prejudice to the applicant. Further, if, in obvious breach of the deed of priority, LBT exercised rights in impairment of the applicant's rights, the applicant would not only have notice but if forced to commence a proceeding against LBT, he would inevitably win. Counsel argued that the respondent had gone to significant lengths to meet the applicant's (justifiable) concern, but the applicant unreasonably wanted more, such as (in lieu of cash security) a request for a registered mortgage in its favour; based on a worst-case scenario that might arise from what LBT might do. Counsel argued that, in this regard, a caveat, which the respondent undertook to support, would enable the applicant to meet any contingencies not apparent at the date that security is ordered, and that since any order for security is interlocutory the applicant can, if necessary, make further application.
Alternatively, if the Court ordered security, the quantum awarded should take into account principles that: 1. the Court should veer towards a conservative amount and not try to confer a complete indemnity (of estimated party and party costs); 2. the amount fixed for security should not, in fact, reflect a pre-estimate of party and party costs; 3. one of a number of reasons for the last point is that cases frequently do not run all the way to trial and judgment, so a discount should be made to reflect the uncertainty as to what will occur in the conduct of the proceeding; 4. the amount should not be disproportionate to the sum in dispute. In this respect, the amount for security sought is about 61% of the damages that the respondent claims.
The respondent's Counsel argued that from his client's perspective, the issues in the case were straightforward: it was a 'garden variety' building dispute; although the respondent's complaint was centred on incomplete works against the builder, whose obligations the applicant guaranteed. It is pertinent to point out, however, that Mr Fernandes did not dispute Counsel for the applicant's identification of other issues as arising which, amongst other things, put in issue whether variations had been agreed between the respondent and the builder.
In oral argument, the respondent's Counsel highlighted particular concerns about the estimate for security provided. He argued that Mr Siddle's revised schedule indicated actual or potential 'doubling up': it would be expected that documents had already been reviewed in order for the applicant to prepare his defence. He submitted that the costed estimates for mediation and attendance at the hearing, based upon the time spent by 4 lawyers (Partner, Senior Associate, Lawyer and Junior Counsel) were manifestly excessive. There was likely to be further duplication in time estimated to be spent at and preparing for the mediation with the time estimated to be spent preparing for the hearing (presumably after an unsuccessful mediation).
The respondent argued that the purpose of security was not to provide an indemnity for anticipated party and party costs. Mr Fernandes cited a decision of the Queensland Court of Appeal, Emanuel Management Pty Ltd (in liq) v Foster's Brewing Group Ltd & Ors [2003] QCA 552 where, at [16], Dutney J (Jerrard JA and Philippidies J agreeing) noted the historic practice in England, which was to award security at two-thirds of the estimated party and party costs. Although that approach had recently been abandoned, it nevertheless indicated the conservative way in which courts should assess quantum in applications for security.
The respondent argued that although Mr Draybi had supplied the Court with a competing estimate of costs to Mr Siddel, in view of the onus of proof borne by the applicant, there was no need, or expectation that he would do so and it is unnecessary, for the Court, to simply make a binary choice as to whose estimate should be preferred. But if preference was to be made, the respondent submitted that Mr Draybi's costs estimate should be preferred. It was true that in some respects, Mr Draybi did not provide for any time to be spent by the Partner (or, for that matter, the Senior Associate) but where that occurred, it was generally because the Junior Lawyer would be working closely with the Junior Counsel briefed in the matter. A prime example of this was the expected costs of the issue of subpoena.
Adopting an anticipated recovery at the level of 65% of Mr Draybi's estimate, would see an award for quantum being $86,937.50. Such amount should be paid in 4 stages, rather than a lump sum.

The applicant's submissions in reply

Counsel for the applicant argued that it had reason to be perturbed about what course, for example, LBT might take. If it acted in breach of the deed of priority, the applicant had no effective recourse against LBT. In effect, Counsel argued, why should it be put to the trouble of prospective enforcement action down the line when the applicant had not indicated why it could not stump up, within a reasonable period, cash security, or something like that? The applicant not only wanted security, but security which was readily accessible.

Consideration

For applications of the present kind, generally three issues arise: whether any of the bases in r 42.21(1) are (or whether the ground in s 1335 of the Corporation Act is) made out; whether the Court should exercise its discretion to order security and finally the quantum of security (including also how and when it should be furnished).
Once it is shown that a basis for security arises - in this case, prospective impecuniosity - an evidential burden, of showing that an order for security should be refused outright, or of lesser amount than that sought by the applicant, falls on the respondent: Pioneer Park Pty Ltd (in liq) v ANZ Banking Group (2007) 65 ACSR 383. That said, the legal burden of proof on whether security should be ordered remains with the applicant: Cornelius v Global Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301 per Macfarlan JA (Ward JA and Tobias JA agreeing) at [18]-[20].
As the applicant correctly submits, the respondent only drew attention to the circumstance that an alternative form of security, in lieu of a 'cash payment' for security, as being the only bar to court-ordered security (whether as a matter of power and/or discretion). For the purpose of r 42.21(1A) of the UCPR, I am satisfied that: 1. the respondent has reasonably arguable prospects of success, notwithstanding that a defence has been filed and issues identified, and that its claim is genuine; 2. other than the right of indemnity, the respondent is impecunious; 3. it has not been established that its existing or prospective impecuniosity has been caused by the applicant's conduct; 4. it has not been established that an order for security would stifle the proceeding; 5. no public interest consideration has been identified as militating against an order for security; 6. there has not been any unreasonable delay in the applicant agitating this application.
On balance, these considerations weigh in favour of the order.
As already indicated, subject to the qualification regarding the proposed alternative, the respondent concedes that there is a basis for security. As its citation from Professor Dal Pont's text [1] indicates, if all that a corporate trustee can point to as assets against which a costs order against it is enforced is a right of indemnity, prima facie the condition in r 42.21(1)(d) and/or s 1335 of the Corporation Act 2001 (Cth) is fulfilled.
I accept the respondent's submission, founded upon what was said in Rosengrens Ltd v Safe Deposit Centres Ltd [1984] 3 All ER 198, that on applications of this kind, it is appropriate for the Court to act flexibly, or pragmatically, in a way that tries to do justice to both parties. More specifically, in the words of Parker LJ (at 200-201) "So long as the opposite party can be protected, it is right and proper that the security should be given in a way which is the least disadvantageous to the party giving that security. It may take many forms. Bank guarantee and payment into court are but two of them … So long as it is adequate, then the form of it is a matter which is immaterial." This passage in Rosengrens has been applied (amongst other Courts) in the New South Wales Court of Appeal [2] .
But when a Court contemplates ordering security in a form other than cash, it will be astute to determine whether there are real questions over the value and/or realisability of the non-cash security [3] .
By its conduct, the respondent has clearly evinced that it would be more advantageous to its interests if the security should be given as proposed than if it was obliged to provide cash security. So long as that provides reasonable protection for the applicant's interests, it should be permitted to do so.
I consider that the matter is finely balanced. Clearly, the respondent has gone to significant steps to try to persuade the applicant that his interests will be sufficiently protected which do not require the Court's intervention.
On balance, however, I am persuaded that, given the undemanding test under r 42.21(d), there is a reason to believe that, even with the steps proposed to be put in place, the respondent may not be able to meet an adverse costs order.
First, it is plainly the case that the applicant's interests will be subject to the control and conduct of a non-party to the proceeding. The respondent did not call evidence from the manager or controller of LBT on this application. No undertaking to the Court of any kind was made on LBT's behalf. The respondent asks the Court to act on the faith of LBT's commitment, as represented by the respondent. It is of some significance that there appears to be some personal ties between the respondent and LBT, which might explain why LBT has, so the applicant has been informed, agreed to enter into the deed of priority. But the Court cannot discount the possibility that in the future, commercial circumstances may be such that LBT will consider that the benefits of breaching the deed of priority may exceed the anticipated costs of doing so without reference to the interests of the respondent; let alone the applicant. The applicant is justifiably concerned about this prospect; particularly where the respondent has failed to supply persuasive evidence about the status of the development; including independent assessment of the value(s) to be ascribed to the apartments.
This leads to the second point; which is that not only is there a concern that LBT will exercise control, there is also a concern that the applicant faces a prospect of having to institute other proceedings to enforce rights under the deed of priority. This bespeaks a lack of realisability or an impracticability for the applicant in enforcing his rights; notwithstanding the undertakings made by the respondent. As Counsel for the applicant correctly noted, in any enforcement of the charge, there may be interests other than LBT which fall for consideration and even if it became apparent that the applicant only needed to be concerned about LBT's position, the respondent did not supply information about LBT's actual or prospective financial position. The Court is not oblivious to more recent risks about sales of real properties under a substantial development; especially in a context of recent rises in interest rates and recent and/or prospective falls in land or property values.
These concerns are elevated in a context where the unitholders of the trust have not undertaken to be liable for the applicant's costs; and where the respondent has not suggested that cash security would stultify the respondent's claim.
In circumstances where the condition in r 42.21(d) (and/or s 1335 of the Corporations Act) is satisfied, and the other discretionary matters I have outlined point in favour of the order that security should be given, it is appropriate for that order to be made.

Quantum

The Court's task is to engage in a necessarily imprecise exercise in impression, which involves balancing the interests of both parties. It is not the task for the Court to place itself in the shoes of a prospective costs assessor. That is particularly so where neither party relied upon independent opinion of a costs consultant. The Court instead adopts a 'broad-brush' approach [4] and, consistently with that, it is unnecessary for the Court to "delve into the minutiae" of the competing costs estimates [5] .
I note that the respondent does not dispute the reasonableness of the rates of the legal practitioners on the applicant's team. Nor the line items in Mr Siddle's schedule which generically describe the work.
My firm impression is that, acknowledging the diligence in which it reached its time estimates, the applicant is seeking the Court's imprimatur for an amount reflecting a pre-estimate of what costs it will likely recover on an assessment. A potential flaw in that approach is partly indicated by the consideration identified in r 42.21(1A)(k), being whether the security is proportionate to the importance and complexity of the subject matter in dispute. It is also partly indicated by the terms of s 60 of the Civil Procedure Act 2005 (NSW); being one of the overriding case management objectives. To accede to the amount claimed by the applicant would be to yield an amount of security which is over 60% of the damages sought by the respondent. Following the (admittedly more extreme) example of April Fine Paper Macao Commercial Offshore Ltd v Moore Business Systems Australia Ltd (2009) 75 NSWLR 619, where an applicant's costs were estimated at 80% of the claimed amount and security was ordered at 30% of the claimed amount, to award security in the amount claimed would be disproportionate if the focus was purely upon the sum identified in prayer 1 of the statement of claim. However, it is fair to say that the quantum of the plaintiff's claim is likely to increase very substantially if it obtains an award of pre-judgment interest, given the age of the events the subject of the proceeding. I think it is reasonable, when considering the proportionality principle, to factor in the prospect of an amount of pre-judgment interest being obtained where that forms a substantial component of the aggregate sum claimed for the monetary judgment.
The respondent's Counsel did not take issue with the applicant's Counsel identification of issues in paragraph 14 of her submissions (MFI 1) as genuinely arising. My impression is that with issues of incomplete work and variations in play, for works concerning what appears to be a significant development project, and which to some extent will be the subject of expert evidence, potentially, the parties will do well to complete the matter for hearing within 2 days; even with the affidavit evidence and expert report(s) that will be prepared. However, the parties' pleadings are such that there is presently an absence of particularity of the extent of the differences on these issues.
The adoption of what is essentially a pre-estimate of costs which would be recovered on an assessment has contributed to an assumption that the order for security will reflect acceptance of all of the work performed by all of the legal practitioners on the applicant's team in a 'Rolls Royce' defence of the proceeding. In my view, that assumption is contestable. Further, whilst I accept that Mr Siddle has an important supervisory role, consistent with his ultimate responsibility as the solicitor on the record, my impression is that much of the work undertaken by the junior lawyer could be sufficiently supervised by the senior associate, or perhaps more pertinently, by Junior Counsel, without yet another layer of supervision by the partner in respect to every conceivable area of work that is expected to be performed. An example of this is the preparation and review of documents produced on subpoena. That said, my impression is that Mr Draybi's estimate, which substantially reduces the role of partner involvement, is excessively skewed in the opposite direction.
There is, in my view, cause for some scepticism in the estimates which warrant the application of a general discount rather than, as the respondent suggests, engaging in discounts on a line-by-line basis. In this context, to take one example, it cannot be assumed, and the Court would not encourage the notion, that there will inevitably be an interlocutory fight about discovery, for which Mr Siddle makes very substantial provision. Parties do not have a right to discovery and are required to prove the necessity for it. It would generally be expected that any order for discovery would only follow from the service of at least lay evidence which, would, the Court would hope, already have narrowed the issues for resolution beyond those which arise from the close of the pleadings. For the moment, the Court is asked to assume that all possible processes, such as discovery and subpoenas at an abstracted level, which may not be eventually required or, if they are, where the scope of apprehended disputation may not be as significant as originally feared. But the evidence suggests that Mr Siddle has already issued a subpoena (to Teak Projects Pty Ltd) and a notice to produce for inspection to the respondent (separate to Exhibit D in this application); and it is not clear who else he may have subpoenas issued to; or what additional categories for discovery he seeks which have not earlier been answered in response to the notice to produce. Very substantial provision is made for discovery, but it appears very likely that a preponderance of costs to be incurred for discovery will be incurred by the respondent, not the applicant, who was not a director, secretary or member of DDC.
Another example is that some of the work necessary for the preparation of the mediation, on such matters as working up the real issues for resolution and marshalling arguments to facilitate the mediation (say, for a position paper), is also likely to be duplicated in terms of preparation for hearing in terms of such things as the preparation of schedules of damages or issues.
I take into account, in the applicant's favour, the likely recoverability of Counsel's fees and other disbursements in full, and also recovery for GST.
I accept that some discount should be given to deal with ordinary contingencies of litigation, such as the ever present possibility that litigation will not run to a hearing and judgment. That, I think follows, from the principle that the order for security is not intended to indemnify the defendant for all of its anticipated recoverable party and party costs. I do not consider that Parker J held to the contrary in Les & Zelda Investments; at least categorically. His Honour acknowledged (at [83]) that discounts for the possibility of settlement and other vicissitudes were sanctioned in the authorities, especially where it is ordered on a once and for all basis, but observed that there was less occasion to do so where it was ordered in separate tranches. In that case, there were three tranches. Notwithstanding his Honour's views, with respect, it is common for discounts to be awarded on anticipated reasonable party and party costs even where that occurs in fewer stages than his Honour determined in that case. [6] In my view, given that the security is to be ordered in two tranches, it is appropriate for discount to be awarded on the overall sum, with the grant of liberty being reserved for the defendant to apply for further security.
Having regard to the circumstances, I propose to take the mid-point figure in Mr Siddle's revised calculations [7] (combining solicitor costs and 100% of disbursements and recovery of GST) and discount it by 30%. This yields a rounded sum for security of $205,000.
The majority of those costs would be incurred in preparation for and conduct of the trial. There is no reason why the whole of the security should be provided long before it is required, to secure costs that will not be incurred for some time (if at all). I do not accept the respondent's proposal that it be paid in 4 stages, which is apt to lead to some complexity and potentially, multiple approaches to the Court if there is any non-compliance. Security should be given for the pretrial component now ($135,000), but for the trial component ($70,000) only when the matter approaches final hearing.
The parties should have the opportunity to be heard on costs of the notice of motion. After I announced the result, I received short submissions from the parties' legal representatives.
The Court makes the following orders: 1. The plaintiff is to give security for the costs of the defendant of the proceeding, in a form acceptable to the registrar, as follows: 1. within 28 days, a sum of $135,000; 2. not less than 28 days prior to the date fixed for hearing, a further $70,000. 1. If security is not given in accordance with orders (a) and (b), the proceeding is to be stayed. 2. The defendant has liberty to apply for further security. 3. The costs of the defendant's notice of motion dated 15 June 2022 are the defendant's costs in the cause.

Endnotes

G.E. Dal Pont, Law of Costs (4th ed, electronic version, LexisNexis Butterworths) ("Dal Pont") at [28.26]
Blue Oil Energy Pty Ltd v Tan [2014] NSWCA 81 at [21].
Dal Pont at [28.47]
Allstate Life Insurance Co v ANZ Banking Group (1995) 134 ALR 187 per Lindgren J at 201
Chief Disruption Officer Pty Ltd atf the McDonald Family Trust v Michel, in the matter of Laava ID Pty Ltd [2022] FCA 148 ("Chief Disruption Officer") per Goodman J at [60]; REAC Ltd v HIH Casualty and General Insurance Ltd (in liq) [2003] FCA 803 per Jacobson J at [100]
Evidenced, for example, in two decisions cited earlier in these reasons: Street at [41] and Chief Disruption Officer at [62], [63], [67].
As set out in paragraphs 15 - 16 of Mr Siddle's second affidavit. 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: 05 September 2022

Corporations Act 2001(NSW)s 1335

Corporation Act 2001(Cth)

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