defendant. Security for costs ordered: First Plaintiff to provide security for defendants' costs in the sum of $112,000 by payment into Court, bank guarantee or other means by 7 August 2020; proceedings...
Key principles
Where a plaintiff company is impecunious, a court may order security for costs under the UCPR or s 1335 Corporations Act, and delay in bringing an application is not an absolute...
A personal undertaking by an interested third party will be a powerful discretionary consideration, but where the profferor is impecunious and is very likely to be made bankrupt...
A mortgagee's contractual right to indemnity for costs (under mortgage clauses providing indemnity) does not automatically preclude an order for security for costs; the court...
When quantifying security the court may start from a defensible estimate of future recoverable costs on an ordinary basis, exclude speculative items (such as mediation costs and...
Issues before the court
Whether the defendants were entitled to an order for security for costs against an impecunious corporate plaintiff.
Whether delay in bringing the security for costs application defeated the defendants' application.
Plain English Summary
The NSW Supreme Court ordered Elip (an admittedly impecunious corporate plaintiff) to provide security of $112,000 for defendants' costs and stayed the proceedings until it was paid. The Court rejected Elip's objections: delay in bringing the application was not fatal because defendants had given forewarning and no hearing was imminent; the director's late personal guarantee was unreliable because he was likely to be made bankrupt; and the remaining receivership surplus did not cover the defendants' assessed future costs. The Court quantified security on an ordinary costs basis, removed speculative items, applied a 10% precautionary discount, deducted available surplus and amounts already expended, and rounded the result to $112,000. Costs of the security motion were ordered against Elip.
AI-generated legal information, not legal advice. Zoe can make mistakes. Check the cited source, and for advice about your situation consult a qualified Australian lawyer.
What weight to give a proposed personal undertaking by the plaintiff's sole director who was likely to be made bankrupt imminently.
Whether the defendants' contractual indemnity (mortgage clauses) meant security should be measured on an indemnity basis or otherwise affected the...
Cited legislation
5 cited instruments linked from this judgment.
Deep Dive
1,606 words · generated 16/08/2026
What happened
Elip Pty Ltd (a corporate trustee and the plaintiff) sued Arch Finance, Perpetual Trustee and the receivers of a mortgaged Gladesville property. The mortgagee (Perpetual, at Arch's direction) took possession, appointed receivers, sold the property, and after paying secured debt left a modest surplus in the receivership. Elip alleges misrepresentation and that the receivers sold the property at an undervalue.
Defendants applied (20 December 2019) under UCPR r 42.21 and, alternatively, s 1335 Corporations Act for security for costs and a stay of proceedings. The application followed events that materially changed the risk profile: a natural co-plaintiff (Mrs Mastronardo) was made bankrupt, and her trustee served a s 60(3) notice disclaiming further prosecution of the proceedings. Receivership accounts showed defendants had drawn legal fees against the surplus; the surplus had been substantially depleted by April 2020 (to about $45,950), with about $300,620.76 already spent on legal fees, of which approximately $209,770.83 related to these proceedings on a solicitor-client basis (the court accepted $150,000 as the likely recoverable amount on the ordinary basis).
At the hearing (12 June 2020), Elip proffered a last-minute personal undertaking (written guarantee) from its sole director, Mr Mastronardo. Defendants did not accept it. Kunc J concluded that security for costs was warranted; the court ordered Elip to provide security of $112,000 by payment into court (or by bank guarantee) by 7 August 2020, stayed proceedings until provided, and ordered Elip pay the defendants' costs of the security motion.
Why the court decided this way
Three streams of reasoning drove the decision.
Threshold and discretionary exercise:
The parties agreed Elip was impecunious, so the statutory threshold under UCPR r 42.21 / s 1335 was satisfied.
The question was purely discretionary; the court balanced competing factors drawn from authorities such as Buckley v Bennell and Idoport: whether delay was fatal, whether the defendants had adequate security from the receivership surplus, and whether the proposed personal undertaking justified refusing security.
Delay not dispositive:
Elip argued defendants had delayed (about 13 months) and that delay should usually be fatal (citing Buckley). Kunc J accepted that delay is relevant but not determinative. Key reasons that delay did not defeat the application included:
Defendants had given clear prior warning (letter of 18 Feb 2019) that they were drawing on the surplus and that a security application might follow.
Receivership accounts were supplied in March 2019 showing a surplus; Elip did not challenge defendants' use of the surplus then and continued to prosecute the case aware the surplus was being applied to defendants' costs.
The application followed the trustee's disclaimer and the depletion of the surplus; there was a legitimate explanation for waiting while a natural co-plaintiff (Mrs Mastronardo) remained involved.
No hearing was imminent and Elip did not demonstrate specific prejudice besides having incurred legal costs.
Undertaking by likely-to-be-bankrupt director given little weight:
While the Court of Appeal in Vintage Marine treats an interested third party's personal undertaking as a "very powerful consideration," that is context dependent.
Here the proposed guarantor (Mr Mastronardo) had no significant assets, had been director of companies in receivership, and faced imminent bankruptcy proceedings (creditor's petition by CBA). Kunc J emphasised the lawfulness and practical effect of bankruptcy, the proffered undertaking would be unenforceable or at least have negligible value once a trustee in bankruptcy administered any claim.
Therefore the undertaking did not displace an otherwise appropriate security order.
Quantification methodology:
The plaintiff argued that the defendants were adequately secured by the receivership surplus and, because the mortgage contained indemnity clauses, security should reflect indemnity. The court adopted a cautious approach:
Following Kyabram, contractual entitlement to indemnity is relevant but still subject to the court's discretionary costs power; the court should not pre-empt final costs orders.
The court therefore quantified security on a sensible ordinary party/party basis (likely assessed costs), to avoid anticipating the final exercise of discretion at trial.
The court accepted the defendants' costs expert's overall methodology (Mr Taylor) but excluded speculative items (mediation costs and the costs of the security application itself), applied a 10% precautionary discount for evidentiary deficiencies, deducted the remaining surplus (~$45,950) and further deducted an amount ($150,620.76) to eliminate unfairness arising from timing (defendants had already used part of the surplus to meet costs), resulting in a final figure of $112,379.08 rounded down to $112,000.
Before and after state of the law
Before:
Principles for security for costs have been long-established: threshold of impecuniosity, discretion to order security, and relevance of delay and forewarning (Buckley v Bennell; Idoport). Mortgagees' contractual rights to indemnity for costs are recognised but remain within the court's costs discretion (Kyabram).
This decision:
Applies those principles to a fact pattern where defendants had partially funded litigation costs from a receivership surplus and where a co-plaintiff's bankruptcy altered the risk profile.
Clarifies practical weight to be given to a personal undertaking when the profferor is likely to be bankrupt: such an undertaking will rarely suffice to displace security.
Re-iterates a pragmatic approach to quantifying security: assess on an ordinary basis, exclude speculative items, apply a precautionary discount where evidence is imperfect, deduct available surplus and compensate for timing-related unfairness.
After:
The judgment reinforces that undertakings from persons who will shortly be bankrupt are of little value in resisting security for costs.
It emphasises careful forensic quantification, and that contractual indemnities do not automatically displace the court's ordinary-basis approach on security applications.
Key passages with plain-English translation
"Delay is not an absolute bar to the making of an application." (Decision)
Plain English: Even if a defendant waits a long time before asking for security, that does not automatically stop the court from ordering security. The court examines the reasons for delay and whether it was unfair.
"I therefore approached the defendants' application by reference to costs on the ordinary basis only."
Plain English: Instead of assuming the mortgagee will be entitled to indemnity costs at the end, the judge calculated security using the more conservative standard party/party costs figure a court would normally allow.
"The undertaking of a bankrupt or of a person highly likely to be made bankrupt, would rarely, if ever, be a sufficiently persuasive factor to stand in the way of the Court making an order for security..."
Plain English: If the person offering to guarantee the plaintiff's costs is about to be bankrupt, their promise is unlikely to stop the court ordering security because bankruptcy makes such promises practically worthless.
The arithmetic process (exclude mediation and security-motion costs; apply 10% discount; deduct surplus and prior expenditures)
Plain English: The judge explained step-by-step how to estimate fair security: start with likely recoverable future costs, remove speculative costs, discount for uncertainty in evidence, subtract any money already available to the defendants, and subtract amounts already spent that otherwise would have been available if the application had been earlier.
What fact patterns trigger this precedent
An impecunious corporate plaintiff sues where defendants have access to a limited fund (e.g., receivership surplus) and are applying it to legal costs, and:
A natural person co-plaintiff who might have provided alternative recourse is made bankrupt or otherwise drops out (reducing defendants' likely recovery avenues); or
Defendants delayed in applying but can show prior warning/forewarning and legitimate reasons for waiting; and
A proposed personal undertaking is from a person with no assets or with imminent bankruptcy exposure.
Practical triggers:
Trustee disclaimers under s 60(3) Bankruptcy Act.
Receivership accounts showing drains on surplus that leave defendants inadequately secured.
Late personal guarantees from individuals facing insolvency.
How later courts have treated it
This decision is a trial-level (Supreme Court NSW) application of established principles. It expressly engages with:
Buckley v Bennell and Idoport on delay; treats delay as relevant but not determinative.
Kyabram on mortgagee indemnity; follows the approach that contractual indemnities do not oust the court's discretion.
Vintage Marine; accepts that undertakings can be powerful but distinguishes where the profferor is or will imminently be bankrupt.
Later courts will treat Kunc J's reasoning as persuasive authority for:
Giving limited weight to undertakings from persons with imminent bankruptcy risk.
The particular arithmetic approach to quantifying security on ordinary basis and then adjusting for speculative items, evidential uncertainty and timing unfairness.
Still-open questions
The judgment pragmatically uses ordinary-basis assessment rather than indemnity-basis for security quantification. The precise circumstances where a mortgagee's contractual indemnity should be treated as determinative on a security application remain fact-sensitive; Kyabram continues to require careful pleading and argument if a mortgagee claims indemnity as a substantive right.
How courts should treat layered, multi-party claims when some plaintiffs remain solvent while others become bankrupt (and where costs are likely to be joint and several) will remain a case-by-case balancing exercise.
The decision underlines the significance of timing and accounting transparency. Parties who wish to rely on a receivership surplus should keep contemporaneous accounting and clear disclosure to reduce later disputes about what remains available for costs.
The decision leaves open methodological matters: different expert approaches can yield markedly different figures; courts will likely continue to require clear solicitor evidence of tasks and resource allocation rather than rely solely on cost consultants' extrapolations.
Final reminder: This is general legal information, not legal advice. I can make mistakes. Before you act on this analysis, rely on it, or use any draft arising from it, get a qualified Australian lawyer to check it.
Judgment (12 paragraphs)
[1]
Summary
At the conclusion of a hearing last Friday in the Applications List I made these orders:
"1. Grants leave to the defendant/applicant to re-open for the purpose of admitting into evidence an email dated 25 March 2019 at 4.43pm from Leona Adams to Masi Zaki attaching a copy of the accounting for the receivership to date.
2. On or before 7 August 2020 the first plaintiff is to provide security for the defendants' costs of the proceedings in the sum of $112,000 by payment into Court, provision of a bank guarantee or such other means as the parties may agree or in default of agreement as may be determined by the Registrar in Equity
3. Order that the proceedings be stayed until such time as the security referred to in order 2 is provided.
4. The first plaintiff is to pay the defendants' costs of the defendants' motion filed on 20 December 2019."
These are the reasons for orders 2 to 4. Order 1 was not opposed.
The first plaintiff ("Elip") is an admittedly impecunious trustee company. It sues in its own right and as trustee of the Pile Street Discretionary Trust (the "Trust").
The second plaintiff ("Mrs Mastronardo") was a director of Elip and is a beneficiary of the Trust. She is no longer playing a role in the proceedings because she is now bankrupt.
The first defendant ("Arch"), with Perpetual Trustee Company Ltd ("Perpetual"), lent an amount in excess of $3 million to Elip to refinance the purchase of a property at Gladesville (the "Property"). The loan was secured by a registered mortgage over the Property in favour of Perpetual.
Elip defaulted. The third defendants (the "Receivers") were appointed to sell the Property. The Property has been sold. After paying out Elip's debt, the receivership was left with a surplus which the defendants have, in part, being applying towards their costs of these proceedings.
Elip sues Arch and Perpetual for alleged misrepresentation. It also sues the Receivers for allegedly selling the Property at a substantial undervalue.
By notice of motion filed on 20 December 2019, the defendants sought orders which included security for the defendants' future costs against Elip under Part 42 r 42.21 of the Uniform Civil Procedure Rules (2005) (NSW) (the "Rules") or s 1335 of the Corporations Act 2001 (Cth) (the "Act") and for the proceedings to be stayed pending provision of that security. Neither party suggested that there was any relevant difference in relation to the principles to be applied depending upon the jurisdictional source of the power to order security for costs.
With commendable efficiency, the parties confined the argument to the four matters upon which Elip relied in opposition to the orders sought by the defendants. Those matters, and the Court's conclusions, may be summarised as follows:
1. Elip submitted that the defendants had unreasonably delayed in bringing the application, waiting until the proceedings had been on foot for almost a year, including with Elip having filed its evidence in chief. The Court rejected this submission because there was no prejudice relied upon by Elip other than the fact that it had already expended costs in prosecuting the litigation, the parties were well aware that the defendants were drawing on the surplus in reliance on their contractual right of indemnity to cover their costs of the litigation and that the surplus was at risk of being exhausted before the proceedings came to a hearing. The Court was satisfied that Elip had acted promptly to bring the application after Mrs Mastronardo had been made a bankrupt and her trustee had indicated that she would not be continuing the proceedings on her behalf.
2. Elip submitted that the defendants were adequately secured by the surplus. This submission was not borne out mathematically once the Court had come to a view as to how the security should, in effect, be set off against the balance of the surplus remaining. That balance was less than the amount which the Court concluded represented Elip's entitlement to security.
3. Elip relied upon a personal undertaking proffered by Mrs Mastronardo's husband, who was now apparently the sole director and secretary of Elip, that he would provide a personal guarantee in writing by way of security for the defendants' costs. The Court concluded this did not assist Elip because such evidence as there was about Mr Mastronardo's financial circumstances suggested that he was impecunious and, decisively for present purposes, was himself likely to be made bankrupt in a matter of days by reason of the imminent hearing of a creditors' petition against him in the Federal Circuit Court.
4. Elip took issue with the quantum of security claimed by the defendants. While the Court accepted that the defendants were not entitled to security in respect of matters such as the costs of the present motion or the costs of some future mediation, the Court nevertheless concluded that the defendants had demonstrated an entitlement to security which, after deducting the surplus and making other adjustments, was in the sum of $112,000.
Elip had also submitted that, if security were to be ordered, it should be staged. The Court rejected this submission because the overriding purpose would be better served by ascertaining whether Elip would be able to raise the security before the defendants were put to the expense of preparing their evidence in response to Elip's claim.
Mr S Duggan of Counsel appeared for the defendant applicants on the motion. Mr M Henry of Senior Counsel appeared with Ms T Jonker of Counsel for Elip.
[2]
The facts
The facts were not in dispute and most of what follows is gratefully adopted from the very helpful outlines of submissions provided by the parties.
In September 2014 Elip was incorporated for the purpose of being the corporate trustee of the Trust.
The Trust was settled for the purpose of acquiring the Property.
On 26 November 2014, in its capacity as trustee of the Trust, Elip acquired the Property.
In early 2016, Elip refinanced the Property with funds advanced by Perpetual pursuant to terms set out in a letter of offer dated 20 November 2015 from Arch.
On 29 January 2016, Perpetual advanced $3,050,000 to Elip.
On 29 January 2016, Elip granted a mortgage over the Property to Perpetual securing an advance recorded as $3,250,000, although it was common ground that the amount of the original advance was $3,050,000 (the "Mortgage").
The Mortgage included the following terms:
"8. MONEY TO BE PAID BY THE MORTGAGOR
8.1 Costs
The Mortgagor agrees to pay the following amounts to the Mortgagee on demand:
(a) reasonable costs for negotiation, preparation, stamping and registration of this Mortgage and the Transaction Documents;
(b) the costs incurred in relation to the administration and management of this Mortgage (including Receiver's costs) including the cost of granting requests, consents, discharges, releases and producing title deeds in relation to the Mortgaged Property and the fees of any consultants engaged by the Mortgagee to enable the Mortgagee to properly consider any request made by the Mortgagor;
(c) the Mortgagee's costs and the costs of any Receiver incurred in enforcing or attempting to enforce or preserving the Mortgagee's rights under this Mortgage or in considering enforcement action or arising out of anything that the Mortgagor or a Transaction Party does.
(d) the cost of obtaining any updated valuation which the Mortgagee may require from time to time provided that in the absence of an Event of Default the Mortgagee is not entitled to reimbursement for more than one valuation of the Mortgaged Property in any 12 month period;
(e) all fees, charges and taxes (including penalties) arising out of or payment in relation to this Mortgage; or
(f) the costs of completing any works required to be completed to the Mortgaged Property; and
(g) costs paid or incurred by the Mortgagee in doing any act or thing it determines is necessary to preserve the value of the Mortgaged Property.
8.2 Time for Payment
All amounts payable under clause 8.1 are payable by the Mortgagor to the Mortgagee on demand and the Mortgagee can debit those amounts from the Mortgagor's loan account without further reference.
8.3 Indemnity
The Mortgagor indemnifies the Mortgagee for all liabilities, costs or losses (including economic losses) arising out of:
(a) an Event of Default;
(b) the exercise of rights under a Transaction Document including this Mortgage or attempted exercise of rights;
(c) a failure by any party to do any act or thing required to be done under this Mortgage or to exercise any rights under this Mortgage;
(d) any indemnity given by the Mortgagee to a controller or administrator of the Mortgagor or the Mortgaged Property;
(e) actions, claims, demands, damages, proceedings in connection with the Transaction Documents including claims that the Transaction Documents are void or voidable;
(f) a payment being made under this Mortgage in any currency other than the currency under which it is required to be made;
(g) the performance of any obligations by the Mortgagee under any Transaction Document or the performance of any act which in the opinion of the Mortgagee needs to be done in relation to the Mortgaged Property."
[3]
The argument
Elip accepted that it was impecunious so that the threshold question for the making of a security for costs order under either the Rules or the Act had been satisfied. The argument was thereafter conducted without specific reference to which statutory regime was being invoked. No criticism of the parties is intended by that observation. Elip advanced four bases upon which the Court, in the exercise of its discretion, ought not order security for costs:
1. The defendants had delayed in bringing the application;
2. The Proposed Undertaking was a complete answer;
3. The defendants had had, and would continue to have, adequate security from the balance of the proceeds of sale of the Property; and
4. If the Court were minded to grant security, Elip took issue with the quantum sought by the defendants.
I will consider each of these issues in turn. Because the third and the fourth matters are, at least in a mathematical sense, interdependent, it is convenient to consider those two issues as one.
[4]
Delay - the parties' submissions
Elip submitted that the defendants' application had been made some 13 months after the proceedings had been commenced and after Elip had served its lay and expert evidence in chief.
It submitted that a long and unexplained delay should usually be fatal to a security for costs application for the reasons identified by Moffitt P in Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301 at 309:
"The right to seek security for costs and to stay proceedings, with the possible result that a claim for damages is frustrated, is a powerful weapon. Therefore, the litigant who seeks to use it against his opponent is at risk of not having it available, unless the application is made and persevered with in circumstances involving the least oppression of his opponent. The primary reason why the application should be brought promptly and pressed to determination promptly is that the company, which by assumption has financial problems, is entitled to know its position in relation to security at the outset, and before it embarks to any real extent on its litigation, and certainly before it is allowed to or commits substantial sums of money toward litigating its claim."
Elip submitted that, rather than agreeing to having the proceeds of sale paid into a solicitor's trust account or controlled moneys account (see paragraph [25] above), the defendants had elected at an early stage of the proceedings not to bring an application for security for costs but had decided to take the benefit of the proceeds of sale as full indemnity for their costs. There was no adequate explanation for now bringing the application.
Insofar as it was suggested that the basis of the application was the confirmation from Mrs Mastronardo's trustee in bankruptcy that the trustee did not intend to pursue the proceedings, Elip submitted that the real basis for the application was that the defendants had decided that there were insufficient funds remaining from the balance of the proceeds of sale to provide them with a full indemnity for their future legal costs. This was not a proper basis for the defendants now to make a late application for security.
The defendants drew to the Court's attention the statement of relevant principles in relation to delay set out by Einstein J in Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 ("Idoport") (emphasis in original):
"69 Plainly, an application for security must be made promptly: Foss Export Agency Pty Ltd v Trotman (1949) 67 WN (NSW) 1; Buckley v Bennell (1974) 1 ACLR 301 at 308; Southern Cross Exploration v Fire and All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 123. The authorities have recognised that it would be patently unjust to permit a defendant who stood by and allowed the plaintiff to work on their case to ask for security after expenses had been incurred: Smail v Burton; Re Insurance Associates Pty Ltd (in liq) (1975) 1 ACLR 74 at 75.
70 On the other hand, evidence of delay does not necessarily render the application fatal on its own. The passage of time is merely one factor to be taken into account during the balancing exercise undertaken by the Court: Commonwealth of Australia and Another v Cable Water Skiing (Australia) Ltd (1994) 14 ACSR 760 at 762. For example, security for future costs was awarded to the defendant in Commonwealth v Cable where there had been a delay of 4 years after the proceedings had commenced.
71 Lehane J in Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 at 71 recognised that the issue of delay will weigh more significantly in some cases than others. He went on to note however, that the cases in which orders for security were made despite delay have usually involved one or both of two factors, those being:
a) "…that the hearing or resumed hearing was not immediately imminent…"; and
b) "…that there has been some forewarning: usually correspondence concerning the financial standing of those who might benefit from the success of an applicant or plaintiff, and often detailed correspondence foreshadowing an application for security for costs." (71).
72 French J put the matter as follows in Bryan E v Fencott v Eretta Pty Ltd (1987) 16 FCR 497 at 514:
"The further a plaintiff has proceeded in an action and the greater the costs it has been allowed to incur without steps being taken to apply for an order for costs, the more difficult it will be to persuade the court that such an order is not, in the circumstances, unfair or oppressive."
[emphasis added]
73 In Buckley v Bennell (1974) 1 ACLR 301 at 309 Moffitt P put the matter as follows:
"The right to seek security for costs and to stay proceedings, with the possible result that a claim for damages is frustrated, is a powerful weapon. Therefore, the litigant who seeks to use it against his opponent is at risk of not having it available, unless the application is made and persevered with in circumstances involving the least oppression of his opponent. The primary reason why the application should be brought promptly and pressed to determination promptly is that the company, which by assumption has financial problems, is entitled to know its position in relation to security at the outset, and before it embarks to any real extent on its litigation, and certainly before it is allowed to or permits substantial sums of money towards litigating its claim " [emphasis added].
74 In Southern Cross Exploration NL v Fire and all Risks Insurance Co Ltd, Waddell J, in explaining the proper approach to delay, emphasised the following passage in Lindsay Petroleum v Hurd (1874) LR 5 PC 221 at 240:
"… Two circumstances, always important in such cases (that is, where a defendant relies on the doctrine of laches) are, the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy".
[See also Deane J in Orr v Ford (1989) 167 CLR 316 at 341:
"… whether the plaintiff has, by his inaction and standing by, placed the defendant or a third party in a situation in which it would be inequitable and unreasonable to 'place him if the remedy were afterwards to be asserted" ] [emphasis added]"
[5]
Delay - resolution
The Court rejects Elip's submissions based on alleged delay for four reasons.
First, as is noted in paragraph [70] of the extract from Idoport (see paragraph [51] above) delay is not an absolute bar to the making of an application. While it may be accepted that Elip has spent money on the litigation, it was not expressly asserted that Elip had suffered any particular prejudice by doing so.
Two matters in particular struck me as significant.
First, there was no submission, let alone evidence, from Elip that had it known of the possibility of a future application for security for costs, it would not have proceeded to put on the evidence that it had. As will be developed below, the Court is satisfied that it understood that the making of an application for security for costs was dependent upon how much of the surplus from the proceeds of sale remained available to the defendants.
Second, notwithstanding a guillotine order made in 2019 and the fact of this security for costs application (filed in December 2019), Elip continued to work on its evidence so as to produce its expert valuer's report of 28 May 2020. Elip is plainly determined to prosecute its claim and, given the circumstances to which I have just referred, it would be artificial and unrealistic to give any weight to what in other cases could be the very prejudicial reality of a party expending funds to prosecute litigation without an inkling of the possibility of a security for costs application. In the circumstances set out in this and the preceding paragraph, the Court is not satisfied that there is any relevant unfairness or oppression worked on Elip by the making of the application for security for costs at this stage of the proceedings.
Second, and closely related to the preceding reason, Elip knew from at least 18 February 2019 that the defendants were drawing on the surplus, which "will likely be exhausted well prior to trial" (see paragraph [29] above). Elip was provided with accounts in March 2019 which showed that there was approximately $178,000 of surplus funds left in the receivership. There is no evidence that Elip ever suggested to the defendants that the defendants were not entitled to apply that surplus to their legal costs. Implicit in Elip's response of 26 February 2019 (see paragraph [30] above) was that it would not be premature and inappropriate to make a security for costs application if that surplus was not available to the defendants. Elip was content to continue to prosecute its proceedings in the knowledge that the defendants were applying the surplus of the proceeds of sale to their costs. When that point is appreciated, any submission based upon the alleged unfairness of the application being made at this particular point of time, when the surplus has been substantially depleted, can have no persuasive force.
[6]
The Proposed Undertaking - the parties' submissions
The Proposed Undertaking was offered two days before the hearing. As might be expected, the defendants' immediate response was that there was no evidence to suggest that Mr Mastronardo's Proposed Undertaking was worth anything. Elip had not offered any evidence to suggest that Mr Mastronardo had any assets or available funds. Furthermore, such evidence as there was about Mr Mastronardo's financial circumstances was that he had been a director of a number of companies which were now in receivership and that he was imminently to be the subject of the hearing of a creditor's petition brought by the CBA in reliance on the judgment of Hammerschlag J for approximately $18,000,000 (see paragraph [35] above).
For its part, Elip strongly relied on the decision of Brereton JA (with whom Bell P and Macfarlan JA agreed) in Vintage Marine Art Pty Ltd v Henderson & Cremer (No 2) [2019] NSWCA 252 ("Vintage Marine"). In that case, the Court of Appeal, having found error in the judgment at first instance, had to re-exercise the discretion in respect of security for costs against an impecunious corporate plaintiff in circumstances where an impecunious director had offered an undertaking to be personally liable for any future costs order against the company.
Justice Brereton's consideration of the question is to be found in Vintage Marine at paragraphs [21] to [28]. His Honour begins with the proposition that courts will not usually order security where a case for security is made out only against one or some of multiple plaintiffs. His Honour then goes on to consider the position under s 1335 of the Act, which requires those conducting their affairs through a corporation to be prepared to "come out from behind" that corporation. He noted that in Queensland the rule of practice has become that security will not be ordered if those behind a corporation make their own assets, such as they are, available as security for a costs order. However, his Honour concluded that was not the law of New South Wales, summarising the position in this state as (emphasis added):
"28. But while those cases make clear enough that in this Court the proffer of an undertaking of the kind proffered by Ms Edwards does not conclusively determine the question, they also indicate that the existence of such an undertaking is a very powerful consideration which may, in a particular case, be determinative, and that is so whether or not the undertaking or guarantee is supported by any assets. In my view, the proffer of that undertaking, coupled with the other two discretionary considerations to which I have referred, combine to make an overwhelming discretionary case for declining to make an order for further security."
[7]
The Proposed Undertaking - consideration
It is necessary to begin with some factual findings. Mrs Mastronardo was made bankrupt on the petition of CBA relying on the judgment against her of Hammerschlag J (see paragraph [35] above). Having made Mrs Mastronardo bankrupt on Hammerschlag J's judgment, the CBA is now pressing to bankrupt Mr Mastronardo. Its creditor's petition is to be heard later this week. There was no evidence to suggest, and no submission was made, that Mr Mastronardo had any prospect of resisting the CBA's application for him to be made bankrupt. There was certainly no evidence that he had any assets of a material value at all. On the evidence before me, I am satisfied and find that Mr Mastronardo will be made bankrupt or is highly likely to be made bankrupt.
Against the background of those factual matters, there were three reasons why the Proposed Undertaking is insufficient, in the exercise of the Court's discretion, to prevent the making of a security for costs order if the Court is otherwise satisfied (as it is) that such an order should be made.
First, it is clear that Vintage Marine was confined to applications under s 1335 of the Act (see paragraphs [6] and [23] of the judgment). It is therefore not binding upon me insofar as the defendants' application is made under the Rules. There is no doubt that the jurisdiction to order security under the Rules has been successfully invoked. In exercising that, the Court is expressly bound by s 56(2) of the Civil Procedure Act 2005 (NSW) to exercise that jurisdiction to give effect to the overriding purpose of facilitating the just, quick and cheap resolution of the real issues in the proceedings. On the assumption the case for security for costs under the Rules is otherwise made out (which it is in this case), I am respectfully unable to accept how it can facilitate the overriding purpose in this case to give the Proposed Undertaking, offered by an impecunious and likely to be bankrupt person, such weight as to sway the Court's discretionary judgment against making the order for security.
Second, insofar as the application is brought under the Act, I respectfully accept and bear in mind Brereton JA's conclusion that the Proposed Undertaking "is a very powerful consideration which may, in a particular case, be determinative". This is not such a case because the evidence does not enable the Court to conclude that there is even the slightest prospect of the Proposed Undertaking being of any real benefit to the defendants if it were ever called upon. As is set out in paragraphs [64] and [68] above, the evidence is in fact all the other way. Furthermore, although not required by statute, I nevertheless consider the overriding purpose to be relevant to the exercise of the Court's discretion under the Act and, in relation to that, rely on what I have said in the preceding paragraph.
[8]
Adequacy of the surplus and quantum - preliminary issues
Before turning to the detail of the experts' reports on the question of quantum, it is necessary to deal with two preliminary issues.
First, as I have already noted, the defendants have relied on the entitlement to what they submit is a complete indemnity from the proceeds of sale of the mortgage pursuant to clauses 8.1 and 8.3 of the Mortgage (see paragraph [19] above). The parties accepted that, generally, in the absence of countervailing factors, a court would give effect to that contractual right by awarding costs on the indemnity basis. The first preliminary issue is whether the application for security for costs should be considered on the basis that an order for indemnity costs is the likely outcome.
In Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 ("Kyabram"), Beazley JA (as Her Excellency then was) (with whom Hodgson and Ipp JJA agreed) held that, notwithstanding a contractual entitlement to indemnity, a mortgagee's entitlement to costs remained in the discretion of the Court. In that case her Honour declined to award costs on the indemnity basis because the mortgagee had failed to plead such a claim. Her Honour summarised the law as:
"11 The costs of an action in the Court are, pursuant to the provisions of s.76(1)(a) of the Supreme Court Act (the Act) "in the discretion of the Court". This provision is subject to the Act and the Rules of Court. Part 52A r.11 of the Supreme Court Rules provides that subject to Pt.52A costs follow the event except where it appears to the Court that some other order ought to be made. Conventionally, costs are awarded on a party/party basis, unless there is some reason for the Court to make a different order.
12 It is well established that a mortgagee may rely upon its contractual entitlement to costs so as to claim an order other than on a party/party basis. In Re Adelphi Hotel (Brighton) Limited [1953] 2 All ER 498, Vaisey J at 502 observed that the prima facie rule was that costs were awarded on a party/party basis unless some alternative basis was shown "either on some well-recognised principle, or under some contract plainly and unambiguously expressed". The New Zealand Court of Appeal applied the rule to the payment of a mortgagee's legal costs in a recovery action: ANZ Banking Group (NZ) Limited v. Gibson (Court of Appeal) [1986] 1 NZLR 556 at 566, 569.
13 The application of the principle is well recognised in Australia: see Inglis and Anor. v. Commonwealth Trading Bank of Australia (1973) 47 ALJR 234 at 235. In AGC (Advances) Limited v. West (1984) 5 NSWLR 301, Hodgson J stated (at 304-305) that at general law a mortgagee was entitled to party/party costs only but that the general law was subject to the precise terms of any provision of the mortgage. Cole J accepted this to be correct in Sandtara Pty. Limited & Others v. Australian European Finance Corporation Ltd. & Others (1990) 20 NSWLR 82, at 97.
14 AGC v. West and Sandtara were concerned with whether the terms of the mortgage agreement itself provided for costs on a specific basis. The question which arises here is more specific. It is whether the existence of a contractual provision entitling a mortgagee to the costs of litigation in relation to the enforcement of the mortgage governs the parties' entitlements, or whether such a provision is subject to a general discretion in the Court. This question was considered by the Court of Appeal in England in Gomba Holdings UK Limited & Others v. Minories Finance Limited & Others (No. 2) [1993] Ch 171. Scott LJ, delivering the Judgment of the Court, after reviewing the cases stated at 194:
"In our opinion, the following principles emerge from the cases and dicta …
(i) An order for the payment of costs of proceedings by one party to another party is always a discretionary order: s.51 of the Act of 1981.
(ii) Where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right.
(iii) The power of the Court to disallow a mortgagee's costs sought to be added to the mortgage security is a power that does not derive from s.51 but from the power of courts of equity to fix the terms on which redemption will be allowed.
(iv) A decision by a court to refuse costs, in whole or in part, to a mortgage litigant may be a decision in the exercise of the s.51 discretion or a decision in the exercise of the power to fix the terms on which redemption will be allowed or a decision as to the extent of a mortgagee's contractual right to add his costs to the security or a combination of two or more of these things. The pleadings in the case and the submissions made to the judge may indicate which of the decisions to which we have referred has been made.
(v) a mortgagee is not, in our judgment, to be deprived of a contractual or equitable right to costs to the security merely by reason of an order for payment of costs made without reference to the mortgagee's contractual or equitable rights and without any adjudication as to whether or not the mortgagee should be deprived of those costs."
Section 51(1) of the Supreme Court Act 1981 (UK) ,which is in similar terms to s.76 of the Supreme Court Act 1975 (NSW) , provides that the costs of proceedings shall be in the discretion of the Court."
[9]
Adequacy of the surplus and quantum - the parties' submissions
In considering the parties' submissions and in order to understand the approach which the Court ultimately took, it is helpful at this point to recall the mathematics of the surplus in the receivership (see paragraph [40] above). This may be summarised as:
1. With the benefit of settlement adjustments, the Receivers obtained just over $3,700,000 from the sale of the Property. The Court accepts that from this had to be deducted a number of expenses properly incurred, including the Receiver's costs.
2. After paying such costs and returning to Perpetual the approximately $3,200,000 that it was owed, there was still a surplus.
3. The latest figures showed that of that surplus, $300,620.76 had been spent on legal fees and that the remaining surplus, which it was accepted should be taken as being available for the defendants' future legal fees, was $45,949.91.
Not all of the approximately $300,000 expended in legal fees was incurred in these proceedings. On a solicitor client basis, $209,000 of that $300,000 was referrable to these proceedings. The Court has accepted (see paragraph [82] above) that on the ordinary basis that figure is $150,000.
The defendants urged the Court to accept Mr Taylor's figures, not least because the methodological difference between Mr Taylor and Mrs Rosati meant that Mrs Rosati's figures were, on their face, unreasonably low. They represented a double discounting of the defendants' future solicitor client costs. It was submitted that Mr Taylor's figure of $398,812.50 made it clear, as a matter of mathematics, that the requisite security exceeded, on any view, what had been available to the defendants by way of indemnity from the surplus for legal fees both in the past and taking into account the approximately $46,000 that remained.
Elip submitted that the Court should prefer Mrs Rosati's calculations, which demonstrated that the surplus had been and would be adequate security for the defendants' future legal costs. It submitted that where all of the defendants' past legal costs had been covered in full by the proceeds of sale (providing complete indemnity) and $45,949.91 remained, the proceeds provided adequate security for the defendants.
[10]
Adequacy of the surplus and quantum - consideration
I will next set out how the Court determined the amount of security which was ordered.
I accepted that the appropriate starting point for the defendants' future costs on the ordinary basis is Mr Taylor's figure of $398,812.50. Given Mrs Rosati's approach is, in effect, to double discount the defendants' solicitor client costs, I do not accept it.
I carefully reviewed the figures in Mr Taylor's report. The Court is entitled to bring its own experience to bear and it was apparent to me from those figures that Mr Taylor had performed his calculations on the basis of what would be allowed as reasonable on the ordinary basis. One example will suffice. Mr Taylor allowed only two days dedicated pre-trial preparation on the part of junior and senior counsel for the defendants. In my respectful view, that is an appropriately modest allowance for counsels' preparation for a five day hearing of some complexity. That moderation appeared to me to be generally the case in relation to all of Mr Taylor's allowances, consistent with his methodology of going straight to a determination of what would be allowed as reasonable on the ordinary basis.
However, I accept the opinion expressed by Mrs Rosati that, in relation to two significant matters, allowances made by Mr Taylor should not be taken into account.
The first of these was a sum of $19,540 allowed for mediation costs. I accept Mrs Rosati's opinion that those costs would not normally be allowed in considering security for costs because how those costs were to be borne varied from case to case depending on the commercial arrangements made by the parties in relation to the mediation. I therefore consider that an allowance for mediation costs is too speculative in circumstances where it is unknown what terms would be struck between the parties. For example, the Court is aware that in some cases the parties agree to bear their own costs of a mediation, irrespective of the outcome of the proceedings if the mediation fails.
The second issue on which I accept Mrs Rosati's opinion is the costs of the security for costs motion itself. Mr Taylor expressed the view that such costs should be taken into account, which he calculated as $35,995. Mrs Rosati's opinion was that, as a matter of practice, security was not given for the costs of the security for costs motion itself.
[11]
Costs
Mr Henry SC submitted that because the defendants had obtained an order for costs in an amount considerably less than that for which they had contended, the appropriate costs order was for the defendants' costs of the motion to be their costs in the cause. I accepted Mr Duggan's submission that the amount of the final order was still significant and that there was no reason to depart from the prima facie position that costs should follow the event. I therefore ordered Elip to pay the defendants' costs of the motion.
[12]
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: 16 June 2020
Security for costs ordered: First Plaintiff to provide security for defendants' costs in the sum of $112,000 by payment into Court, bank guarantee or other means by 7 August 2020; proceedings stayed until security provided; First Plaintiff to pay defendants' costs of the 20 December 2019 motion.
On 8 August 2018, Perpetual exercised its rights under the Mortgage and appointed the Receivers over the Property.
On or about 9 October 2018, the Receivers entered into a contract to sell the Property to a third party (the "Purchaser") for $3,700,000. Elip has filed an expert's report in these proceedings opining that the value of the Property on 9 October 2018 was in fact $5,250,000.
On 14 November 2018, the plaintiffs commenced these proceedings by summons seeking, among other things, an injunction restraining the sale of the Property.
On 15 November 2018, Lindsay J granted an interim injunction restraining the completion of the sale of the Property to the Purchaser.
On 16 November 2018, the plaintiffs filed an amended summons joining the Purchaser.
In the course of negotiations which resulted in the parties agreeing that the sale of the Property should proceed (see the next paragraph), Elip's solicitors by letter dated 30 November 2018 proposed that upon completion of the sale, all proceeds should be paid into a solicitor's trust or controlled moneys account on the basis that they would not be disbursed unless the Court ordered otherwise, or the parties agreed. This did not come to fruition and the Receivers came into possession of the proceeds of sale.
On 5 December 2018, Pembroke J made orders by consent vacating the orders made by Lindsay J and providing for the proceedings to continue on pleadings.
On 14 December 2018, the sale of the Property to the Purchaser was completed.
On 15 February 2019, by consent, the plaintiffs discontinued the proceedings against the Purchaser.
On 18 February 2019, the defendants' solicitors wrote to Elip's solicitors, including (emphasis added):
"Creditor's petition proceedings regarding Claudia Mastronardo
Please inform us if you are acting for your client, Claudia Mastronardo in respect to the creditor's petition proceedings lodged by Commonwealth Bank Limited t/as Bankwest. The link to the ComCourts portal is here for your reference: https://www.comcourts.gov.aU/file/Federal/P/SYG275/2019/actions.
No doubt your office would be aware of the judgment made against your client whereby her application to set aside the bankruptcy notice was dismissed with costs in Via Sanantonio Pty Ltd v Commonwealth Bank of Australia [2019] FCA 58. Leave was given for an application to be made by the creditor for a special costs order.
Security for costs
Our clients are becoming increasingly concerned about your clients' ability to meet an adverse costs order. The funds held by the mortgagee following the sale will only go so far and will likely be exhausted well prior to trial.
Having regard to your clients' obvious impecuniosity and the merits of the asserted claim, it appears an application may be necessary to require your clients to provide security. We merely note this now to give your clients the opportunity to provide security prior to a more detailed formal request. Sufficient security may avoid the need for any later application for a special costs order, see White Industries (Qld) Pty Ltd v Flower & Hart (1998) 156 ALR 169; [1998] FCA 806.
To that end, please let us have any proposal within seven days."
This letter drew a response from the plaintiffs' solicitors on 26 February 2019 which included:
"In relation to the Judgment against Ms. Mastronardo, we are instructed to confirm that that decision is now the subject of an appeal and is likely also to be the subject of a mediation in the near future. Accordingly, until such time as that appeal (and all avenues of appeal or negotiated settlement are exhausted), your clients can take comfort out of the fact that the underlying dispute is still unresolved and any preliminary judgments of the kind you have identified do not, in insolation, present the facts of the overall circumstances relevant to Ms. Mastronardo's financial and other affairs.
Finally, in relation to security for costs, you will note that your clients have not yet provided a full accounting to our clients despite the sale of the subject property competing (sic) almost three months ago. In order for our clients to properly understand your clients' assertions below, they firstly need to receive a full accounting including an accounting of the monies you say are currently held by the mortgagee but which "will likely be exhausted well prior to trial". Please provide a full accounting so that we can brief our clients appropriately and obtain their informed instructions. Until such time as your clients do so, any request they make for "a proposal" or application they make in respects of supplementary security on top of what they already hold, would be premature and inappropriate."
On 25 March 2019, in response to Elip's request, the defendants' solicitors provided a summary of the receipts and payments in the receivership of the Property. This showed that the Receivers had received $3,704,196.90. It also showed that they had paid out to the secured creditors a sum of approximately $3,200,000 and that after costs and expenses of the receivership (including at that point expenditure on legal fees of $150,846.74), there was a net surplus in the receivership of $178,687.66.
On 29 March 2019, the plaintiffs filed their statement of claim. This alleges numerous causes of action and claims damages as being the costs and interest paid by Elip, the loss allegedly suffered as a consequence of the appointment of the Receivers, the loss of the opportunity to refinance with another lender, and the loss of the opportunity to redevelop the Property either alone or in a joint venture. Elip also alleges that the Property was sold by the Receivers at an undervalue.
On 30 May 2019, a defence was filed.
On 27 August 2019, Mr Mastronardo was appointed as a director of Elip.
On 28 August 2019, a sequestration order was made against the estate of Mrs Mastronardo and a trustee in bankruptcy was appointed. The creditor's petition which formed the basis of the bankruptcy orders against Mrs Mastronardo annexed a copy of orders made by Hammerschlag J on 18 August 2017 which included:
"(1) Judgment in favour of the Commonwealth Bank of Australia ("CBA") against Mrs Mastronardo in the sum of $8,308,208; and
(2) Judgment in favour of the CBA against Mr Mastronardo in the sum of $18,247,162."
In support of their claim, the plaintiffs have served their evidence in chief consisting of affidavits sworn 20 September 2019 and 21 and 24 October 2019 (including an expert accounting report).
On 30 October 2019, Mrs Mastronardo's trustee in bankruptcy provided the defendants with a notice under s 60(3) of the Bankruptcy Act 1966 (Cth) that the trustee in bankruptcy did not intend to pursue these proceedings against the defendants.
On 5 November 2019, the defendants' solicitors wrote to Elip's then solicitors referring to the sequestration order made against Mrs Mastronardo and the (then recent) notice from Mrs Mastronardo's trustee in bankruptcy. The solicitors' letter went on to explain in some detail why it was submitted that Elip should provide security for the defendants' costs and included an estimate of the defendants' fees and costs to trial (presumably from November 2019) of between $294,500 to $374,500. That estimate was based upon the expectation that the final hearing would take three days.
On 20 December 2019, the defendants filed the present motion for security, which seeks orders including:
"1. Order under rule 42.21 (1 )(d) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) that the First Plaintiff give such security as the Court thinks fit, in such manner as the Court directs, for the First, Second and Third Defendants' costs of the proceedings.
2. Order under rule 42.21(1) of the UCPR that the proceedings be stayed until such time as the security is given.
3. Order under rule 42.21(3) of the UCPR that the proceedings be dismissed should the First Plaintiff fail to comply with any order to give security for costs within 28 days of such order being entered.
4. Further, or in the alternative, order under section 1335(1) of the Corporations Act 2001 (Cth) requiring the First Plaintiff to give sufficient security for the First, Second and Third Defendants' costs of the proceedings.
5. Further to paragraph 4 above, an order under section 1335(1) of the Corporations Act 2001 (Cth) that the proceedings be stayed until such time as the security is given."
On 29 April 2020, the defendants' solicitors provided Elip with a further statement of the receipts and payments of the receivership which showed that by that time the legal fees which had been expended were $300,620.76 and that there remained a surplus in the administration of $45,949.91.
Notwithstanding a guillotine order made in relation to the plaintiffs' evidence and the filing of the present motion, Elip filed an expert valuation report in the proceedings on or about 28 May 2020.
On 10 June 2020 (two days before the hearing of the defendants' motion for security), Elip's solicitors wrote to their counterparts for the defendants proposing:
"Nonetheless, in an attempt to resolve the [security for costs] Motion commercially, and strictly on a "without admissions" basis, we are informed by Carmelo Adriano Mastronardo, the sole director and secretary of our client, that he is willing to provide a personal undertaking, in the form of a written personal guarantee, to meet the amount payable in respect of any costs order made against our client in favour of your clients (or any one or more of them) upon final judgment of these proceedings.
Please confirm whether your clients are prepared to agree to the above in lieu of a security for costs order.
We note that this offer is made on an "open" basis. In this respect, our client reserves its right to tender this letter at the hearing on Friday." (the "Proposed Undertaking")
The Proposed Undertaking was not accepted.
Mr Mastronardo is the defendant in bankruptcy proceedings brought by CBA which have not yet concluded. A creditor's petition is listed for hearing in the Federal Circuit Court next Thursday, 19 June 2020.
The defendants submitted, by reference to the factors identified by Lehane J in paragraph [71] of the preceding quotation, that there was no unfairness or oppression to Elip because no hearing date had been set or was imminent, and that Elip had been on notice from the correspondence in February 2019 (see paragraph [29] above) that the defendants were both relying on the surplus funds from the sale of the Property and foreshadowed an application for security to the extent those funds would be inadequate.
Next, the defendants submitted that they were entitled to use the surplus funds from the proceeds of sale in respect of the litigation.
Finally, they submitted that they had acted very promptly after Mrs Mastronardo's trustee in bankruptcy had indicated that the trustee would not be pursuing the proceedings. The significance of that was that while Mrs Mastronardo was an active party to the proceedings, any application for security against Elip would be likely to fail. They relied upon these observations by Black J in Min Kyu Kim v Byung Sun (Eric) Song [2012] NSWSC 103:
"13. However, the individual plaintiffs are the persons behind those companies and are parties to the proceedings and liable to an order for costs in them, and any costs order made against them is likely to be joint and several, so that the Defendants would not be left to look to the corporate plaintiffs alone for recovery of their costs. This matter strongly tends against an order for security for costs in respect of the corporate plaintiffs: Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564; [2004] NSWSC 664 at [69]. To the extent that the policy of UCPR r 42.21(1)(d) and Corporations Act s 1335 is to require a person who conducts his or her business affairs as a corporation and would otherwise be in a position to expose the other party to the proceedings to costs without risking his own assets, to accept liability for costs, that policy seems to be satisfied where that person is already liable for costs of the proceedings as a party to them: Harpur & Ors v Ariadne Australia Ltd & Ors (No 2) (1984) 2 ACLC 536 at 356; Newtimber (Operations) Pty Ltd v Tarong Energy Corporation Ltd [2011] FCA 123 at [32]. …"
Third, the discretionary impact of delay can be overcome if the applicant has a proper explanation for it. In this case the Court is satisfied that, at least prima facie, the defendants were entitled to consider that they could properly draw on the surplus funds for their legal expenses. It is not necessary for the Court to make a more definitive determination about the defendants' entitlement, not least because Mr Henry SC did put some submissions (which it is not necessary for the Court to resolve) as to the proper construction of the extent of the indemnity afforded by the Mortgage.
I also accept as a proper explanation that an application for security would have been much less likely to succeed while Mrs Mastronardo was a co-plaintiff. The evidence does not permit the Court to conclude whether this consideration had in fact stayed the hand of the defendants. It does not matter. For the purposes of the exercise of the Court's discretion, it is sufficient to note the effect on the prospects of an application for security for costs of the presence of a natural co-plaintiff. Furthermore, the Court accepts as a proper explanation the coincidence of Mrs Mastronardo's trustee in bankruptcy disclaiming the proceedings and the depletion in the amount of the surplus funds available to the defendants. These matters are a sufficient explanation for why the application was made when it was, and not before.
Fourth, the Court accepts the defendants' submission that the discretionary weight of any delay against the making of an order will be considerably reduced the more distant the application is from any hearing. No hearing date has yet been fixed and it is plain that much remains to be done before it will be, including on the part of Elip in preparing its evidence in reply and otherwise preparing the matter for hearing.
Elip submitted that the Court should apply the decision in Vintage Marine to the effect that even if Mr Mastronardo was impecunious, and while there was no absolute rule, in this case the Court should regard the Proposed Undertaking as a determinative discretionary factor against the making of an order for security for costs.
Third, accepting that the Court's orders were made in reliance on both the Rules and the Act, a further and determinative feature of the present case is the (at least) very strong likelihood that Mr Mastronardo will shortly be made bankrupt. Insofar as it might be thought the basis of the willingness of a court to give real weight to the undertaking of a person interested in the outcome of the litigation, even when impecunious, is that a defendant should simply take that person as they find them, that in itself assumes a person who is in control of their own affairs. It is well understood that bankruptcy works a fundamental change in a person's legal status. Their estate passes to their trustee to be administered for the benefit of their creditors.
It is one thing for the Court to say to the applicant that they must be content with the undertaking of an interested third party such as it may be. It is another thing entirely for the Court to conclude that an applicant, who has otherwise made out an entitlement to security, should be satisfied by the undertaking of a person where their claim on that undertaking is likely, if not certainly, to be a claim that will have to be pressed along with the claims of other creditors. In my respectful opinion, the undertaking of a bankrupt or of a person highly likely to be made bankrupt, would rarely, if ever, be a sufficiently persuasive factor to stand in the way of the Court making an order for security if it is otherwise satisfied that such an order should be made. Given the very real possibility that Mr Mastronardo will shortly be made bankrupt, the Proposed Undertaking does not avail Elip, in the circumstances of this case, to resist the application for security for costs.
Elip submitted that it would be premature for the Court to deal with the matter on the basis that it necessarily followed that the defendants would be entitled to their costs on the indemnity basis. As it happened, the parties respective costs experts had undertaken their task of ascertaining the defendants' likely recoverable costs on the ordinary basis. They were correct to do so. As follows from Kyabram, a mortgagee's contractual entitlement to indemnity costs is still subject to the general costs discretion of the Court. However likely as this Court might think an order for indemnity costs will be if the defendants succeed, this Court cannot know whether, in the course of the ultimate hearing of these proceedings, some proper reason will present itself (including, for example, a Calderbank offer) which may result in some or all of the successful defendants' costs of the proceedings being awarded on the ordinary basis only or not at all.
Putting this another way, it will generally not be appropriate on a security for costs application for the Court to pre-empt a discretionary judgment as to costs that will present itself at the end of any final hearing. The matter is simply too uncertain. This approach is fortified by recalling that, in any event, an order for security for costs is not intended to be a complete indemnity for a party's future costs. I therefore approached the defendants' application by reference to costs on the ordinary basis only.
The second preliminary issue concerns the expert's report of each party on the question of the defendants' likely costs. Each party briefed a well-qualified expert. Mr Paul Taylor prepared a report for the defendants. Mrs Kerrie-Ann Rosati prepared a report for Elip. Both reports were admitted without objection and neither expert was cross-examined. The difficulty for the Court was that, for reasons to which I will now turn, the two experts passed like ships in the night on the main question of the defendants' future costs of the proceedings calculated on the ordinary basis.
Each expert began her or his report by undertaking what was, in effect, an assessment of the defendants' costs to date. On a solicitor client basis those costs were $209,770.83. Mr Taylor expressed the opinion that if assessed on the ordinary basis, those costs would be allowed at $153,132.79.
For her part, Mrs Rosati substantially agreed with Mr Taylor's analysis. There were, nevertheless, some minor differences and Mrs Rosati's opinion as to the same figure was $143,620.
In the Court's experience, a difference between experts of just under $10,000 in an exercise such as the present one is, to all intents and purposes, de minimis. Insofar as it is relevant, the Court will adopt $150,000 as the likely assessed outcome on the ordinary basis of the defendants' costs to date. Regrettably, the experts' substantial unanimity on the assessment of the defendants' past costs did not carry through to their assessment of the defendants' future costs.
Mr Taylor assessed the defendants' likely future costs on the ordinary basis (assuming a five day final hearing) as $398,812.50. Mrs Rosati assessed the same potential body of costs as $172,890. Part of the explanation for the difference is that Mrs Rosati did not accept that some items which were the subject of Mr Taylor's calculations would be allowed at all. I deal with these in paragraphs [96] to [100] below. Furthermore, and without any explanation, Mrs Rosati allowed only one day of costs in respect of the five day hearing. Mr Duggan accepted, during the course of argument, that an allowance should be made for the costs of all five days of the hypothesised hearing. Nevertheless, the most important reason for the difference between the two experts was a fundamental difference or misunderstanding in methodology.
The Court is familiar with an applicant for security providing their evidence in at least two parts. The first part is generally an affidavit from an experienced solicitor with the conduct of the matter setting out what, in her or his opinion, would be the necessary steps to be incurred in the preparation of the matter for hearing and who in the legal team would take those steps, together with evidence of the experience and charge out rates of the various team members. That affidavit then provides the assumptions for the second part of the evidence usually presented, namely an expert costs consultant taking that information and, in effect, performing a costs assessment on it to come to an opinion of what the likely assessed costs would be.
It is not intended as a criticism to observe that the defendants did not present their evidence in what might be referred to as this familiar way. There was an affidavit sworn by the solicitor with the conduct of the matter, Mr Michael McDonnell. This provided some of the information to which I have referred and was undoubtedly taken into account by Mr Taylor in preparing his report. However, Mr McDonnell did not undertake the detailed task of identifying the steps to be taken in preparing the case for hearing and by whom they would be taken. Instead, this was done by Mr Taylor.
No point was taken about Mr Taylor's expertise. He was provided with all the same material (including pleadings and the evidence filed thus far) as that to which Mr McDonnell had made reference. Mr Taylor then went on in his report to identify the various steps that would reasonably have to be taken (and, in his opinion, by whom) in preparing the matter for hearing and then expressing an opinion as to what a reasonable allowance for those steps would be. In other words, what might be referred to as the middle step of the Court being presented with evidence of the likely solicitor client costs was omitted, with Mr Taylor going, as it were, immediately to the ultimate question of what costs would be allowed as reasonable on an assessment on the ordinary basis.
While Mr Taylor did, in the body of his report, explain his methodology, that explanation was, with respect, perhaps not as obvious as it could have been. It would appear that it was not a point appreciated by Mrs Rosati. Mrs Rosati conducted her analysis by assuming that Mr Taylor's figures were solicitor client figures and then reducing them to what, in her opinion, would be allowed on an assessment on the ordinary basis. It was therefore unsurprising that Mrs Rosati's figure was considerably lower than Mr Taylor's and in stark contrast to their essentially similar approaches to the defendants' past costs.
Quite apart from the different methodological approach, some criticism was levelled against Mrs Rosati's report by the defendants because it was said that she had not undertaken her own assessment ab initio, but had really only made a series of unjustified deductions from particular figures proposed by Mr Taylor. I accept that there is some force in that criticism. However, the real difficulty for the Court in assessing the expert evidence is that on the question of the defendants' likely future costs, the two experts were not assessing the same thing. The consequence of this difficulty is set out in paragraph [94] below.
In support of Mrs Rosati's opinion, Elip relied on the approach taken by Black J in In the matter of Felan's Fisheries Pty Ltd [2016] NSWSC 1351. In that case his Honour said:
"47. SFM also claims, and Ms Vine-Hall excludes, costs referable to this application for security for costs. I accept that the costs of this application are not properly included within the amount of security for costs that is sought, and that matter is properly to be addressed by an order for costs, made in the ordinary way, consequential on the determination of the application. That matter has no effect on SFM's application, where I will not order security for costs in favour of SFM on other grounds. However, the Directors would need to recalculate the amount of security claimed in their application, if and to the extent that they have included such costs in their application."
I will respectfully follow the approach adopted by Black J and accept Mrs Rosati's opinion that the costs of the security for costs application should form no part of the Court's calculations.
Deducting those two items ($19,540 and $35,995) from Mr Taylor's original figure of $398,812.50 gives a figure of $343,277.50. In relation to that figure I accept Elip's submission that some further discount should be made to reflect two matters.
First, I accept Elip's submission that in some of Mr Taylor's calculations, it is not always obvious that he is in fact allowing a sum reduced by reference to what is reasonable on the ordinary basis. One example is the $88,450 which Mr Taylor has allowed as reasonable in relation to the costs of attending to the five day hearing. This figure is made up of allowances of five days for each of senior and junior counsel, supervision and instruction by a principal of five hours (I have assumed spread over the five days) and the costs of an associate solicitor for five days. The reasonable daily rate of the two counsel alone allowed by Mr Taylor gives a figure for a five day hearing of $70,000. It is not clear what Mr Taylor has done to that or the other figures to arrive at his figure of $88,450.
The second matter which I accept justifies some discount as advanced by Elip is that it is Mr Taylor who has undertaken the primary burden of determining what attendances would be required and by whom for the preparation of the matter for hearing. While no issue was taken with Mr Taylor's qualifications, I accept that the Court can have greater confidence in the assessment of the likely tasks and by whom they will be performed if that evidence is provided by the solicitor with the carriage of the matter. Mr Taylor has obviously done what he was instructed to do and cannot be criticised for that. Nevertheless, it seems to me that the Court has not been provided with the best evidence on this aspect of the matter and a precautionary discount is appropriate.
I came to the view that to take account of the matters referred to in paragraphs [102] and [103] above, a further discount of 10% should be made. That discount was not as great as it might have been in other cases because I nevertheless remained of the view that Mr Taylor's figures were conservative. This discount means that a further $34,327.75 should be deducted from the figure referred to in paragraph [101] above of $343,277.50. This deduction yielded a figure of $308,949.75, which I considered was what might be referred to as the defendants' prima facie entitlement to security.
The defendants accepted that whatever figure the Court arrived at should be reduced by the remaining surplus of $45,949.91. When this is deducted from $308,949.75, the figure becomes $262,999.84.
However, in my opinion a further deduction is required. That deduction is consistent with the defendants' acceptance that whatever surplus is left should be treated as available to the defendants for the purposes of the proceedings.
As I have recorded in paragraph [40] above, the latest figures proven to the Court showed that $300,620.76 had been spent of the surplus by the defendants in legal fees. Of that figure, $150,000 is attributable to the proceedings on the ordinary basis (see paragraph [82] above and consistently with the Court's approach to deal with the figures only on the ordinary basis). This leaves a balance of $150,620.76, representing expenditure on other legal fees and what has been a full indemnity in respect of the defendants' legal costs to date.
While the Court has rejected Elip's submission that the defendants' application should not be allowed on the ground of delay, in my respectful view the Court should be astute, in exercising its discretion, to ensure that there is no unfair disadvantage to Elip created by the accident of the timing of when this application has been brought, especially when security is not intended to provide complete indemnity. In other words, if the application had been brought earlier, there would have been a greater amount of the surplus available to be attributed to the defendants' costs of the proceedings in the same way that the remaining surplus is being attributed to the defendants' costs of the proceedings. That unfairness is eliminated by further deducting $150,620.76 (being the difference between the figure on the ordinary basis for the defendants' past costs ($150,000) from the total legal expenditure to date ($300,620.76)).
Making this deduction ($262,999.84 - $150,620.76) gave a final figure of security for costs of $112,379.08 which I rounded down to $112,000.
Finally, I should record that Elip had submitted that the Court should consider the possibility of requiring any security to be provided in tranches. Mr Henry SC, for Elip, did not wish to be heard against the indication which I gave at the conclusion of the hearing that, in my view, the appropriate exercise of the Court's discretion was for the entire amount to be provided before any further steps were taken in the proceedings. This was because (setting aside the possibility which had been raised of the plaintiffs making a further application to amend their pleadings) the next significant expenditure would be on the part of the defendants in preparing their evidence. I did not consider it just for that expenditure to be incurred in the absence of Elip having demonstrated that it is able to provide security in the amount which I ordered at the conclusion of the hearing.