Deangrove Pty Limited v Commonwealth Bank of Australia

REASONS FOR JUDGMENT 1 The respondent ("the Bank") filed a notice of motion on 19 September 2001 seeking an order that the second applicant ("Mr Jeans") provide to the Bank an irrevocable bank guarantee which is "(a) issued by an Australian trading bank; (b) issued in favour of the receivers and managers of the first applicant; (c) payable upon demand; and (d) for an amount of $160,000.00." 2 The background to this application is as follows. The first applicant ("Deangrove") is in receivership. Mr Jeans is its sole shareholder. The proceedings were commenced on 26 October 2000 by Deangrove and Mr Jeans against the Bank. The applicants seek damages and an order setting aside or varying a guarantee given by Mr Jeans in support of facilities granted to Deangrove by the Bank. 3 In Deangrove Pty Ltd (Receivers and Managers Appointed) v Commonwealth Bank of Australia (2001) 108 FCR 77, I held that where a company in receivership, like Deangrove, has a claim against the debenture holder which has appointed the receiver and the receiver declines to pursue the claim against it, the directors are entitled to initiate and maintain proceedings in the name of the company, provided that the directors offer the company a satisfactory indemnity against costs (at 87). Mr Jeans, with the knowledge and approval of Deangrove's sole director, was prepared to offer an indemnity to the Bank, in the following terms (at 88): "John Anthony Jeans undertakes for the benefit of the First Applicant that: (a) he will satisfy and indemnify the First Applicant in respect of legal costs and expenses incurred on behalf of or in the name of the First Applicant for the purposes of the conduct of the Federal Court Proceedings No: N1142 of 2000 between Deangrove Pty Limited (receivers and Managers appointed) and himself as Applicants and Commonwealth Bank of Australia as Respondent; (b) he indemnifies the First Applicant, such indemnity being for the benefit of the First Applicant and the Commonwealth Bank of Australia, in respect of any order for costs, which may be made against the First Applicant in the said Federal Court proceedings hereafter." 4 I said this in the judgment (at 88): "Mr Speakman informed the Court that, subject to the question of security, the receivers consider that an indemnity in this form was suitable. Mr Speakman submitted, however, that if Deangrove were to be permitted to continue the proceedings, Mr Jeans should provide security to support the indemnity. … In my view, the governing principle is that those giving instructions on behalf of Deangrove, in order to continue the proceedings, must demonstrate that "nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders" (Newhart Developments, at 821). Had there been evidence that Mr Jeans has sufficient resources to satisfy an indemnity, it might not be necessary for any security to be provided in support of the indemnity. But no such evidence has been adduced. Nor is there evidence as to Deangrove's financial position. In these circumstances, it seems to me that Mr Jeans should provide appropriate security to support his indemnity to Deangrove if the company is to pursue its claim against CBA." 5 I stood the matter over until 29 March 2001 in order to give Mr Jeans an opportunity to provide appropriate security to support the indemnity. On that date, I made orders by consent in the following terms: "1. Within 7 days, the Second Applicant shall provide to the Respondent a written undertaking in the form attached hereto. 2. Within 14 days the Second Applicant shall secure the said undertaking by providing to the Respondent an irrevocable bank guarantee which is: (a) issued by an Australian trading bank; (b) issued in favour of the first applicant; (c) payable upon demand; (d) be for an amount of $20,000.00 which amount shall be increased to $40,000.00 within seven days of the filing of a defence by the respondent. 3. The amount of the guarantee shall be reviewable upon application by either: (a) the receiver and managers of the first applicant; (b) the respondent. 4. If upon the application contemplated in 3 above, the aggregate value of the bank guarantees in existence at the date the application is filed, is insufficient to cover the Court's estimate of the maximum potential liability of the first applicant to the respondent, at any time within two months after that date, of the second applicant for costs arising out of or in connection with the proceedings, then the value of the bank guarantees required to be provided by the second applicant shall be increased to that amount that equals the Court's estimate of the maximum potential liability at any time within six months after that date, of the first applicant for costs arising out of or in connection with the proceedings." 6 The dispute that has arisen is this: Mr Johnson on behalf of Mr Jeans says that the last part of par 4 of the consent orders must be read so that the "maximum potential liability" of Deangrove is to be assessed by reference to costs incurred after 19 September 2001: that is, costs incurred by the Bank prior to 19 September 2001 are not to be taken into account for the purposes of determining any increase in the value of the bank guarantees to be provided by Mr Jeans. Mr Johnson also says that the "maximum potential liability" of Deangrove to the Bank should be assessed on the basis of an exposure to an order to pay costs on a party and party basis, rather than on an indemnity basis. 7 Mr Bell, on behalf of the Bank, contends that the orders of 29 March 2001 should be construed having regard to the obvious intention of the judgment that Mr Jeans should provide adequate security to support the indemnity. Since Mr Jeans' indemnity is "in respect of any order for costs" which may be made against Deangrove, the expression "maximum potential liability" should be understood as incorporating the possibility that a costs order might be made against Deangrove on an indemnity basis. 8 The Bank further submits as follows: "The structure of the orders made on 29 March 2001 is that if the aggregate value of the bank guarantees in existence at the date of the application (19 September 2001) is insufficient to cover the maximum potential liability of Deangrove to the respondent for costs at any time up to two months after that date, then the value of the bank guarantees required to be provided is to be increased to the amount which would cover Deangrove's maximum potential liability for costs in the period up to six months after the date of the application. The current bank guarantee provided by Mr Jeans is for $40,000. Deangrove's current liability to the respondent for costs up to 7 November 2001 (ie within two months of the application) is [on the evidence] $144,000 on an indemnity basis and $116,000 on a party party basis…. Accordingly, the precondition for an increase in the guarantee is satisfied." 9 It must be said that the language of par 4 of the consent orders made on 29 March 2001 is both ungrammatical and obscure. It would appear that the difficulties are compounded because some words may have been omitted from par 4. For example, should the word "or" be inserted before the phrase "of the second applicant"? It is, however, not necessary to explore all the obscurities, since the Bank's claim is limited to security sufficient to cover the estimate of the "maximum potential liability" of Deangrove to the Bank in respect of any costs order that might be made against Deangrove. No additional security is sought in respect of any possible liability of Mr Jeans himself, as a party to the proceedings, to pay costs to the Bank. Nor is additional security sought in respect of Mr Jeans' indemnity in favour of Deangrove. 10 It seems to me that the "maximum possible liability" of Deangrove to the Bank must be assessed by reference to the possibility that Deangrove may be ordered to pay costs to the Bank on an indemnity basis. The expression "maximum potential liability of [Deangrove] to [the Bank]" could hardly be wider. While an order for costs in this Court will usually be on a party and party basis, the Court certainly has power under s 43 of the Federal Court of Australia Act 1976 (Cth) to order a party to pay costs on an indemnity basis in an appropriate case: see Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225, at 233, per Sheppard J; Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151, at 152-153, per Black CJ. The possibility that such an order might be made against Deangrove, in respect of the whole or part of the Bank's costs, should the Bank be successful in the litigation, cannot be ruled out. The language of par 4 is apt to embrace that possibility. In my view, this construction of par 4 of the orders is supported by the terms of the indemnity given by Mr Jeans, specifically his undertaking to indemnify Deangrove in respect of "any order for costs, which may be made against [Deangrove]". 11 The first part of par 4 of the orders requires the Court to determine whether the · aggregate value of the bank guarantees in existence at the date of the application is filed, · is insufficient to cover the Court's estimate of the maximum potential liability of Deangrove to the Bank · at any time within two months after the date of the application. 12 Both parties agreed that this part of par 4 was intended to define a precondition that must be satisfied if the Bank is to obtain an order increasing the amount of the bank guarantees to be provided by Mr Jeans. While the language of this part of par 4 is hardly pellucid, I think what is intended is that an estimate be made of the maximum potential costs exposure of Deangrove to the Bank should an order for indemnity costs ultimately be made in favour of the Bank. The language does not seem to me to limit the assessment of Deangrove's liability to costs incurred after the date of the application to increase the amount of the guarantees. The assessment by the Court is to be made by reference to a date no later than two months after the application is made. But it is Deangrove's total potential exposure to costs that is to be assessed. If that total is greater than the value of bank guarantees in existence at the date of the application, then the precondition is satisfied and the amount of the bank guarantees is to be increased. 13 Applying this construction to the present case, the application was made by the Bank on 19 September 2001. At that date, a bank guarantee provided by Mr Jeans in the sum of $40,000 was in existence. The evidence shows that, as at 2 November 2001 (that is, within two months of the application being filed), the maximum potential liability of Deangrove to pay costs to the Bank, assessed on an indemnity basis, was plainly substantially in excess of $40,000. Accordingly, the so-called precondition has been satisfied and the amount of the bank guarantees to be provided by Mr Jeans is to be increased. 14 Mr Johnson accepted in oral argument that the construction I have adopted of the first part of par 4 is correct. He submitted, however, that the latter part of par 4 should be interpreted differently. It will be recalled that if the precondition is satisfied, "then the value of the bank guarantees required to be provided by [Mr Jeans] shall be increased to that amount that equals the Court's estimate of the maximum potential liability at any time within six months after that date [that is, of the application], of Deangrove for costs arising out of or in connection with the proceedings". 15 The difficulty with Mr Johnson's contention is that the second part of par 4 uses precisely the same language as the first part: "estimate of the maximum potential liability at any time within six [two] months after that date". If the first part of par 4 is intended to require an assessment of Deangrove's total maximum potential liability for costs at a particular date, it is extremely difficult to follow why the second part of par 4 is not intended to require a similar assessment. Paragraph 4 might have been drafted so as to give effect to the construction advanced by Mr Johnson, for example by providing that the estimate was to be of Deangrove's liability for costs incurred during the six months period. However, I do not think the language actually used is apt to achieve this result. In my view, the second part of par 4 contemplates an assessment of the maximum total potential exposure of Deangrove to pay costs to the Bank on an indemnity basis, calculated as at a date no later than six months from the date of the application. The increase in the guarantee is to be the equivalent of the difference between the value of any guarantees in existence at the date of the application and the maximum total potential exposure of Deangrove to an order for costs calculated on an indemnity basis. The latest date by reference to which the calculation should be made in this case is 19 March 2002. 16 At first glance it might be thought that this construction is likely to give rise to repeated applications by the Bank for increases in the amount of the bank guarantees. The order seems to me, however, to contemplate that an increase in the amount of the required bank guarantees will ordinarily be made once every six months or so. This is because any given order can take account of Deangrove's total potential exposure to a costs award in the proceedings up until a date approximately six months after the application for security was made. If the maximum exposure to costs is calculated reasonably accurately, ordinarily there would be no occasion to make a fresh application until the security had been more or less exhausted. The "precondition" is designed to ensure that a fresh application for additional security cannot succeed unless the guarantees already in place will be exhausted within a period of two months from the date of the application. 17 In my view, the appropriate course is to remit to a Registrar of the Court the assessment of the additional bank guarantees to be provided by Mr Jeans, such assessment to be made in conformity with these reasons. The parties are in agreement that the assessment is to be carried out by the Registrar in accordance with the principles generally applicable to an assessment of an award of costs on an indemnity basis. 18 The orders that I make are as follows: 1. The motion be remitted to a Registrar of the Court for assessment of the quantum of the additional bank guarantee to be provided by Mr Jeans, such assessment to be in conformity with these reasons for judgment and orders. 2. The hearing before the Registrar be expedited. 3. (a) The affidavit evidence read before me be evidence in the assessment to be determined by the Registrar; (b) Mr Jeans have leave to file and rely upon (subject to any proper objections) a further affidavit by Ms Davitt, in answer to Mr Cockayne's affidavit, such affidavit to be filed and served on or before 14 December 2001; (c) there be no cross-examination of deponents in the proceedings remitted to the Registrar; and (d) the assessment be made by the Registrar in accordance with the principles generally applicable to an assessment of costs where costs have been ordered to be paid on an indemnity basis. 4. Without prejudice to the Registrar's assessment and the final orders made on the motion, Mr Jeans provide to the Bank, by 21 December 2001, an irrevocable bank guarantee which is (a) issued by an Australian trading bank; (b) issued in favour of the receivers and managers of Deangrove; (c) payable on demand; and (d) for an amount of $68,000, such guarantee to be in addition to the guarantee already provided by Mr Jeans. 5. Costs of the motion be reserved for consideration by me. 6. Liberty be granted to apply on 48 hours notice. 19 The reasons for making orders in this form appear sufficiently from the transcript of the hearing of 5 December 2001. I have in mind that, once the Registrar makes the assessment, I shall make final orders on the motion. This will include an order as to the costs of the motion. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice SACKVILLE.