In these proceedings, the plaintiff sued two defendants, Mr Ryan Kay and Mr Alexander Kay, in relation to a share sale and purchase agreement or agreements executed on 23 March 2018 for the sale to the plaintiff of certain shares in two companies involved in the internet gaming industry. As a result of the bankruptcy of the first defendant, the matter is now proceeding only against the second defendant, Mr Alexander Kay.
By a Notice of Motion filed on 20 February 2023, the second defendant is seeking security for costs against the plaintiff pursuant to Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") r 42.21 or, alternatively, s 1335 of the Corporations Act 2001 (Cth). The second defendant relies upon the affidavits of his solicitor, Mr Samuel Delaney, of 20 February 2023 and 6 April 2023. The motion is opposed by the plaintiff who relies upon the affidavit of its solicitor, Mr Maurice Lynch, of 17 March 2023. The Court has heard submissions in court this morning in addition to the written submissions of counsel for each of the parties.
This is not the first application made by the second defendant for security for costs. An earlier application was determined by Stevenson J on 15 December 2020. His Honour determined that security for costs in the amount of $25,000 be provided by the plaintiff in respect of the second defendant's costs (see Fanma Pty Limited (formerly Playup Australia Pty Ltd) v Kay [2020] NSWSC 1823).
In bringing this second application, the second defendant submits:
1. that the undisputed evidence is that the plaintiff will not be able to satisfy any costs order against it;
2. that those who would stand to benefit from these proceedings on the plaintiff's side have refused to come forward and accept any liability for costs and;
3. there has been a material change in the proceedings since the question of security was heard by Stevenson J in December 2020, such that further security is necessary to provide fair and just protection to the second defendant.
As to (a), the plaintiff concedes that the jurisdictional threshold for ordering payment of security for costs has been met. That is to say, it is conceded that there is reason to believe that the plaintiff company will be unable to pay the costs of the second defendant if ordered to do so. That satisfies the threshold in respect of both UCPR r 42.21 and s 1335 of the Corporations Act.
As to (b), the plaintiff did not submit that an order for security would stifle the proceedings, so it may be inferred that those who stand behind the plaintiff are able to provide security if it is ordered, but have chosen not to come forward to personally accept any liability for costs.
As to (c), the plaintiff does not contest that there has been some change in the proceedings since the first application, but it says that the change is more confined than that contended for by the second defendant. The plaintiff further says that it would not be appropriate to order further security in all the circumstances.
The plaintiff's principal objections to the security sought by the second defendant are, in summary:
1. that the second defendant is guilty of delay in bringing the application, and;
2. that the quantum of the security sought is, for various reasons, excessive.
The plaintiff also raised an objection that the second defendant is bringing a cross-claim in the proceedings but has not undertaken to not prosecute the cross-claim in the event that the plaintiff's claim is stayed as a result of a failure to provide security. That objection has been met by the second defendant giving an undertaking that, in the event the plaintiff's proceedings are stayed by reason of a failure by it to provide security, he would take no further steps on the cross-claim whilst the proceedings are so stayed.
As the application rests upon the contention that there has been a material change in circumstances since the first application, and as the plaintiff raises delay as a reason to oppose the application, it is necessary to give some consideration to the history of the proceedings.
The proceedings were commenced in October 2018 by the filing of a Summons. In December 2018, the plaintiff filed a List Statement. An Amended Commercial List Statement was filed in February 2019. It appears from the Court file that, in March 2019, the second defendant filed a List Response and also his Cross-Claim.
The progress of the proceedings was affected by the circumstance that it is related to other proceedings, and that those proceedings became the subject of appeals to the Court of Appeal. The relevant judgments of the Court of Appeal were given in March 2020. The proceedings thereafter involved, amongst other things, the application for security for costs that was heard in December 2020.
It seems that that application was brought in circumstances where orders of the Court had been made for the plaintiff to serve evidence, in particular additional evidence, but had failed to do so by the time of the hearing. It further appears to be the case that, at the hearing, counsel for the plaintiff informed Stevenson J that amongst the additional evidence to be served was expert evidence as to quantum. This is noted in paragraph 9 of the earlier security for costs judgment.
The amount of security sought on that occasion was only an amount of about $68,000. It seems that some items of potential costs were not included within the scope of the application, including the costs of expert evidence and the costs of any mediation. In any event, for the reasons given by his Honour, including particular difficulties with the evidence as to quantum, only $25,000 was ordered by way of security. That security was paid.
The further evidence that had been foreshadowed was served by the plaintiff, but not until February 2022. The evidence included an affidavit of a Mr Gwynne, who is an expert accountant. His affidavit was accompanied by a lengthy expert report. The report went to issues relating to quantum.
As the evidence had been served out of time, the plaintiff required the leave of the Court in order to rely upon it. That leave was granted by the Court on 21 April 2022. On that day, orders were made for the second defendant to file any application for security for costs by 1 June 2022.
Both parties made changes to their solicitors on the record in May 2022. The time for the second defendant to put on any application for security for costs was extended to 29 June 2022. In the meantime, the solicitors for the parties - by now Mr Lynch and Mr Delaney - were engaged in communications concerning the matter generally, including as to security for costs. It is noteworthy that, on 23 June 2022, Mr Lynch sent an email to the second defendant's solicitors which included the following:
Our client will be filing an amended pleading and we hope to have a draft of that for your review early next week. In addition, we anticipate needing to serve a further report of Mr Gwynne.
In respect of your client's security for costs application if further time is required then that is no issue.
On 17 August 2022, the plaintiff filed a Second Further Amended List Statement and, on 21 November 2022, the plaintiff served some further evidence, including a supplementary report of Mr Gwynne.
On 15 December 2022, orders were made for the second defendant to file and serve any application for security for costs by 13 February 2023. That date was extended to 20 February 2023, which is the date the present motion was in fact filed.
Turning first to the question of whether there has been a material change in circumstances since the first application, Mr Delaney deposed, at paragraphs 41 to 47 of his first affidavit, to various matters, including:
1. the further evidence served in February 2022;
2. the Second Further Amended List Statement filed in August 2022 (that included a number of new allegations of breaches of warranty); and
3. aspects of the reports of Mr Gwynne.
That evidence of Mr Delaney's is not expressly challenged by Mr Lynch.
Mr Delaney went on, in paragraph 48 of his affidavit, to state:
In response to the amendments made to the Plaintiff's claim since the hearing of the First Security Application, and the evidence filed by the Plaintiffs [sic] between January and November 2022, I expect that the following additional steps will need to be taken in the defence of the proceeding to trial.
Mr Delaney then outlined four areas which comprise what he described as the "additional steps". These are:
1. expert evidence;
2. discovery and subpoenas;
3. mediation, and;
4. additional trial preparation and hearing time.
Mr Lynch responded to paragraph 48 of the affidavit at paragraph 19 of his affidavit. In summary, Mr Lynch agreed with Mr Delaney that the second defendant would need to put on evidence from a valuation expert in response to the expert reports of Mr Gwynne. In relation to discovery and subpoenas, Mr Lynch disagreed that there would be a need for any motion seeking discovery in circumstances where orders have recently been made in respect of discovery. In relation to mediation, Mr Lynch deposed that it was not an additional step which needs to be taken in these proceedings as a result of the actions of the plaintiff since the first security for costs application. Mr Lynch stated that he considered mediation to be a step which was foreseeable at the time of the first application. Mr Lynch agreed with Mr Delaney in relation to the additional hearing time. It seems that the estimated hearing time at the time of the first application was three days, whereas it is now common ground that the hearing will take no less than four days. Mr Lynch did not expressly state his view concerning Mr Delaney's statement that the trial preparation will now be more involved than what was anticipated at the time of the first application.
Both solicitors have provided their own estimates of the likely costs and expenses that would be incurred by the second defendant in relation to the so-called additional steps. I note in that regard that Mr Delaney has revised some of his estimates in his affidavit in reply.
The first matter to consider is whether there has been a material change in circumstances since the first application, justifying an order for further security (see Misthold Pty Ltd v NSW Historical Sites and Railway Heritage Company Pty Ltd [2022] NSWSC 42 at [17] to [19]).
In my opinion, there has been such a material change in circumstances since December 2020. In particular, the plaintiff has served a considerable amount of further evidence, including the expert reports of Mr Gwynne. That evidence, or at least much of it, ought to have been served by the time of the first application. As noted by Stevenson J, despite several directions of the Court, the evidence was "still not to hand". In addition, as deposed to by Mr Delaney and not challenged by Mr Lynch, the Further Amended List Statement filed in August 2022 contained a number of new allegations of breach of warranty. These new allegations were no doubt dealt with in the further evidence served by the plaintiff, in either February or November 2022. As I have already noted, it seems to be accepted that the likely length of the hearing has increased to at least four days. I note further that the expert evidence of Mr Gwynne is likely to have a significant effect on the costs likely to be incurred by the second defendant in defending the claim against him. Whilst it became known at the hearing of the first application that expert evidence was to be relied upon by the plaintiff in relation to quantum, the precise nature of the evidence, and the scope of the evidence, was not. It is apparent that the very need for expert evidence was not squarely in contemplation when the first application was made.
The next matter to consider is whether the second defendant's application should nonetheless fail due to delay.
It is true that most of the plaintiff's further evidence, including Mr Gwynne's first report, was served in February 2022, one year before the present motion was filed. There is, thus, a period of delay present. However, having considered the evidence of the procedural history and the communications between the parties during that period, I have concluded that the delay is not such as to warrant refusing the second defendant's application on that ground.
The following matters may be noted. The plaintiff's further evidence served in February 2022 was late, so the plaintiff needed the leave of the Court to rely upon it. As I have said, that leave was not granted until 21 April 2022. On the same day, orders were made for the second defendant to file any application for security for costs by 1 June 2022.
I have already referred to the communications between the parties, including the email sent by Mr Lynch on 23 June 2022. In that regard, Mr Delaney deposed that, having received confirmation that the plaintiff would be filing an amended pleading, he formed the view that any application for security for costs should be filed after the filing of the amendment and after the service of the further report of Mr Gwynne. In the circumstances, including Mr Lynch's statement that further time was "no issue", the approach taken by Mr Delaney seems quite reasonable.
Mr Lynch's statement could reasonably be understood as conveying that there would be no issue if the foreshadowed security for costs application awaited the amended pleading and further report of Mr Gwynne. No suggestion was made by Mr Lynch that any delay in bringing the application might be a difficulty for the second defendant. If any such delay was intended to be relied upon by the plaintiff as a ground to oppose the application, I think that should have been stated. At the very least, there should have been an express reservation of the plaintiff's rights in that regard. Mr Gwynne's supplementary report was not in fact served until 21 November 2022.
It should be noted that the plaintiff served further evidence in November 2022, that is, during the period of the alleged delay. That circumstance can be seen as giving rise to unfairness if an application for security for costs is later brought (see, for example, Liberty Grove (Concord) Pty Limited v Mirvac Projects Pty Limited [2008] NSWSC 48 at [7] per Einstein J). However, the situation in the present case is very different from the situation his Honour had in mind. There is no suggestion that the plaintiff would not have put the evidence on in any event. Further, it is clear that the plaintiff, being aware that the second defendant was contemplating bringing such an application, let it be known that, if further time was required, that would be "no issue".
In all the circumstances, I do not regard the second defendant's delay as unreasonable or sufficiently egregious to warrant the refusal of the application. Having taken the course it did, I would not regard it as appropriate to require any security to be given in respect of any costs incurred by the second defendant before the bringing of the application. However, that is not really an issue here, as the application is focused upon costs likely to be incurred by the second defendant from this point on.
In that regard, the parties are at issue concerning the likely quantum of such costs and the extent to which some of the costs properly relate to the changed circumstances since the first application. As noted earlier, those costs, described as costs for "additional steps", are said to fall within four categories.
Both solicitors have provided estimates of costs and disbursements in relation to the four categories. It is appropriate to recognise that, whilst no independent expert evidence has been given, both solicitors are experienced practitioners well able to give informed opinions on these questions. Further, it is appropriate, in circumstances where there has been no independent expert evidence called, and of course no cross-examination, that the Court take a broad brush approach when considering questions of quantum.
The first category, and the largest item, concerns expert evidence. The solicitors essentially agree on the amount for disbursements for expert evidence in the sum of $130,600. That figure may thus be readily accepted. There is a divergence between the solicitors as to the likely legal costs in respect of expert evidence. Taking a roughly mid-point between the two opinions, each of which seems to me to be a reasonable approach and soundly based, would yield a figure of about $16,900. I would adopt that figure.
On the next category, namely discovery and subpoenas, it is the case that there will no longer be any costs incurred on any discovery motion. There will, however, be some costs incurred by the second defendant in the inspection and review of documents, and I think costs in the sum of $4,000 should be recognised there. In relation to subpoenas, it now seems that there is likely to be only one subpoena required. I propose to adopt a figure of $3,375 for legal costs and $1,224 for disbursements in respect of the subpoena.
As for the next category, namely mediation, taking a mid-point approach again, I would adopt a figure of $18,600 for legal costs and $10,500 for disbursements.
Turning then to the last category, namely additional trial preparation and an additional day of hearing, the solicitors agreed that the disbursements would be $35,200. That figure can thus be accepted. In relation to legal costs, and again taking a mid-point approach, I would adopt a figure of $23,100.
In the result, I think that the legal costs for the four categories should be calculated as about $66,000, the disbursements should be calculated as $177,500.
Applying a percentage of 70% to the legal costs, and a percentage of 95% to the disbursements, yields figures of $46,200 and $168,625 respectively. That is a total of $214,825. That figure may be taken as a broad brush estimate of the total quantum of recoverable costs in respect of the four categories of "additional costs".
I think that it would be appropriate and in the interests of justice to order the plaintiff to provide further security in respect of those costs expected to be incurred by the second defendant.
I have considered whether the amount for mediation should be excluded from the calculation on the basis that it ought to have been but apparently was not included in the scope of the first application made to Stevenson J. However, I think that as the second defendant has established that there has been a material change in circumstances since then so as to justify the making of a further order for security, it ought to be able to seek security in respect of all types of costs likely to be incurred by it in the future.
Viewing the matter overall, I consider it appropriate to make an order that the plaintiff provide further security for the second defendant's costs in the sum of $210,000. The Court will so order.
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Decision last updated: 21 April 2023