Franks v Equitiloan Securities Pty Ltd

LEGISLATION CITED : Civil Procedure Act 2005, s 90(2)

CASES CITED : Franks v Equitiloan Securities Pty Ltd [2008] NSWSC 33 HPM Pty Ltd v Fear [2002] WASCA 249 (S)

4333/00: Phillip Maurice Franks (plaintiff/first cross-defendant) Equitiloan Securities Pty Limited (first defendant/second cross-claimant) Equitiloan Limited (second defendant/first cross-claimant) Wayne McIvor (third defendant) Mark McIvor (fourth defendant) PARTIES : Windy Dropdown Pty Limited (second cross-defendant) 3435/01: Equitiloan Limited (plaintiff) Windy Dropdown Pty Limited (defendant) 2473/06: Equititrust Limited (plaintiff) Martin John Green, Administrator (first defendant) Peter Paul Krejci, Administrator (second defendant)

4333/00: Mr M S Willmott SC w Mr M W Sneddon (plaintiff/cross-defendants) COUNSEL : Mr M G McHugh w Mr A Di Francesco (defendants/cross-claimants) 2473/06: Mr J T Johnson (defendants)

4333/00: DTA Lawyers (plaintiff/cross-defendants) Tucker & Cowen (defendants/cross-claimants) 3435/01: SOLICITORS : Purcell Insolvency Lawyers (plaintiff) Watson Mangioni Lawyers Pty Ltd (defendant) 2473/06: Tucker & Cowen (plaintiff) Watson Mangioni Lawyers Pty Ltd (defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4333/00 Phillip Maurice Franks v Equitiloan Securities Pty Ltd 3435/01 Equitiloan Ltd v Windy Dropdown Pty Ltd 2473/06 Equititrust Ltd v Martin John Green JUDGMENT (Ex tempore) 1 HIS HONOUR: I gave judgment in these proceedings on 1 February 2008 and indicated in substance what result I thought ought to follow, but adjourned the matter with directions for the parties to bring in short minutes to give effect to the judgment [Franks v Equitiloan Securities Pty Ltd [2008] NSWSC 33]. That has produced a number of further issues for resolution. 2 The first issue is the quantification of the judgment to which Mr Franks is entitled. There is no dispute that the principal sum should be $252,090. There is a dispute as to whether interest should be allowed on it and, if so, as to the calculation of that interest. For Mr Franks it is submitted that he should have interest at the rate prescribed for interest on unpaid judgment debts, from the date on which the funds were wrongly paid to Equitiloan Securities - namely, 17 November 2000 - until judgment (which will be today). Although at first it was in dispute, it can now be regarded as uncontroversial that, so calculated, interest would amount to $175,779. However, Equitiloan Securities submits that interest should be limited to $52,524 (in respect of the period from 17 November 2000 until 12 March 2003, when the proceedings were adjourned on the application of Mr Franks to enable him to raise and pursue a point on which he ultimately failed). 3 An award of interest is compensatory, not penal. It recognizes that the defendant has had the use of the plaintiff's money during the relevant period. It is not refused merely to penalise delay. No penalty is involved in requiring a defendant to disgorge the benefit which it has enjoyed from the use of the plaintiff's money until judgment, and correspondingly compensating the plaintiff for loss of use of the money during that period. I will therefore allow interest, for the total period to judgment, in the sum of $175,779. 4 Equitiloan Securities and Equititrust next submit that the judgment should be expressed in terms that the first defendant Equitiloan Securities or the second defendant Equititrust pay the plaintiff the judgment sum. Underlying this submission is an attempt to permit Equititrust to then set-off the judgment in its favour on its cross-claim against Windy Dropdown. 5 On 13 November 2000, when Equititrust was joined as a defendant, it gave an undertaking to the Court that it would pay to the plaintiff any amount which was found by the Court to have been paid by the plaintiff to the defendants or either of them in excess of the amount found by the Court to be due under the mortgage. That undertaking was given in the context of, first, a partial transfer of the mortgage by Equitiloan Securities to itself and Equititrust; secondly, the refusal of Windy Dropdown's application for an order requiring the discharge of the mortgage without payment of the full amount claimed; and thirdly, as it seems to me, in order to protect and preserve the position of Windy Dropdown in circumstances where there was a partial transfer of the mortgage and the funds might be paid by the first defendant to the second defendant and the ability of Windy Dropdown to recover any overpayment complicated in that way. 6 In my view, the purpose of the undertaking was to ensure that the transfer of the mortgage and the application - as between the defendants - of the funds received upon its discharge would not defeat any equity of the plaintiff to recover them. It was not the purpose of the undertaking to effect a transfer of primary liability to give restitution from the first defendant to the second defendant, but to ensure that recourse could, if necessary, be had to Equititrust. 7 In the substantive proceedings, I concluded (at [84]) that the claim for restitution of the overpaid interest was brought and lay against the first defendant Equitiloan Securities, which was the real lender to Windy Dropdown and which received the benefit of the overpayment. That means that it was Equitiloan Securities that was primarily liable, at the suit of Windy Dropdown or its assignee, to give restitution. The fact that Equititrust chose to expose itself to liability to make that payment also, in order to avoid the consequences which might otherwise have arisen on 11 November 2000, is no reason for diminishing Equitiloan Securities' obligation to do so, let alone to give judgment jointly and severally against Equititrust as well as Equitiloan Securities, when the plaintiff does not seek that outcome - although, if Equitiloan Securities were not to pay, some ancillary procedure might be appropriate to enforce the undertaking against Equititrust, as in effect a guarantor. Accordingly:

(1) I give judgment that the first defendant Equitiloan Securities pay to the plaintiff Mr Franks the sum of $427,869. 8 The plaintiff did not succeed against the third defendant Wayne McIvor or the fourth defendant Mark McIvor, and as against those defendants the proceedings should be dismissed. Accordingly: (2) I order that as against the third and fourth defendants the proceedings be dismissed. 9 On the cross-claim, it is not in dispute that the amount which Windy Dropdown should be held liable to pay Equititrust is $722,880. It is also not in dispute that, were interest to be awarded, the appropriate amount would be $97,876.21 up to the date on which Windy Dropdown went into administration, namely 24 June 2004. However, given that Windy Dropdown is in administration, the only manner in which any judgment could be enforced would be by proof in the administration. In those circumstances, the appropriate course is, in the cross-claim, simply to make a declaration, and then to reflect that outcome in the proof of debt proceedings. As any entitlement to interest is contingent on the exercise of discretion of the Court and not a provable claim, it is unnecessary to consider any further the question of interest in the cross-claim and in the proof of debt proceedings. Accordingly:

(3) On the cross-claim, I declare that the cross-defendant Windy Dropdown is liable to pay the cross-claimant Equititrust the sum of $722,880.

(4) In the proof of debt proceedings 2473/06, I order that the appeal from the administrators' decision be allowed, and that in lieu of the administrators' decision the proof of debt of the plaintiff Equititrust be admitted in the sum of $722,880. 10 That then leaves the question of costs. The plaintiff Mr Franks has substantially succeeded, though by no means on all issues litigated. While, if discrete issues on which an otherwise successful party fails have contributed significantly to the length or costs of proceedings, it is open to the court to sever those issues and make special costs orders, that is not the usual course. I am unpersuaded that the plaintiff's failure on some issues here detracts from his substantial success in obtaining the relief for which he originally sued on his claim. The first defendant Equitiloan Securities should pay the plaintiff's costs of his claim, except insofar as they are solely attributable to the case against the third and fourth defendants. Mr Franks sues as a substituted party, and the rights of his predecessor accrued to him, so that the costs order in his favour includes the costs incurred by his predecessor as plaintiff, namely Windy Dropdown, those costs being attached to the cause of action which he purchased. 11 So far as the plaintiff's failure against the McIvors is concerned, in principle the plaintiff should pay the McIvors' costs. However, those costs are unlikely to have added much, although they will have added in a minor way, to the costs of the defence as a whole, there having been common representation of the defendants throughout. The proper result is that the plaintiff should pay the costs of the third and fourth defendants, only to the extent that they are solely referable to the defences of those defendants. 12 So far as the cross-claim is concerned, the cross-claimant Equititrust succeeded substantially, if not totally, on its cross-claim against Windy Dropdown. It is not in dispute that Equititrust is entitled to its costs of the cross-claim. However, Equititrust submits that Mr Franks should be primarily responsible for those costs, as a person who was granted leave to defend the proceedings on behalf of the cross-defendant Windy Dropdown. 13 In this respect, it is important to recognize, first, that whereas at one stage it was possible that Mr Franks might have had a personal exposure on the cross-claim, he succeeded (at an earlier stage of the proceedings) on the argument that he was not so exposed as a result of the assignment to him of Windy Dropdown's cause of action against Equitiloan Securities. Next, although it may be that he had an indirect interest in the outcome of the cross-claim - in that he was a shareholder in and creditor of the company in administration - he defended the cross-claim for the benefit of the administration fund and not for his own separate benefit. All those having an interest in that administration fund would have benefited had he succeeded in the defence of the cross-claim. Thirdly, had he not done so, the administrators themselves would have defended the cross-claim, in all likelihood at greater cost to the fund than the costs incurred by Mr Franks, whose representation of Windy Dropdown made it possible to achieve efficiencies, since he was otherwise represented in the course of the proceedings. Fourthly, insofar as it might be suggested that a person who has some management of an action - such as a director of an insolvent company - who causes the company improperly to prosecute or defend proceedings (see HPM Pty Ltd v Fear [2002] WASCA 249 (S), [5]) in this case there is nothing to suggest that Mr Franks' defence of the proceedings on behalf of Windy Dropdown was improper. Indeed, the administrators had already rejected Windy Dropdown's proof of claim, and would themselves have defended the proceedings had Mr Franks' intervention not relieved them of that responsibility. 14 Accordingly, I am unpersuaded that a costs order should be made against Mr Franks personally in that respect. There will be an order that the cross-defendant Windy Dropdown Pty Ltd (in administration) pay Equititrust's costs of the cross-claim. 15 Mr M G McHugh advanced a submission that, as an incident of the Court's general discretion as to costs under s 90(2) of the Civil Procedure Act 2005, I should take into account that, whereas the plaintiff Mr Franks will recover his judgment in full, the cross-claimant Equititrust will be left to prove in a liquidation in which there will be very limited funds available, and will receive only a few cents in the dollar. 16 It seems to me that this is really an attempt to revisit the question of set off, by another means. I do not accept that - as was submitted - the result otherwise provides a charter for the associates of insolvent companies to purchase their causes of action and pursue them, free of associated cross-claims. It was because there was no mutuality that a cross-claim was not available [Franks v Equitiloan Securities Pty Ltd [2008] NSWSC 33, [109]]. Equitiloan and Equititrust are two distinct albeit related legal entities. If there were mutuality, then there would have been an available set-off. In those circumstances, I see no reason why as a matter of discretion under s 90 I should reduce the costs to which Mr Franks is otherwise entitled - and even less so make him liable for the costs of Windy Dropdown as cross-defendant - in a case in which he assumed the conduct of the defence for the benefit of the creditors generally and probably thereby reduced the overall costs. Indeed, I do not accept that the insolvency of the unsuccessful cross-defendant is, in the context of this case, at all relevant to what costs orders should be made between the plaintiff and the defendant. 17 Attention was drawn to the circumstance that there were some reserved costs in proceedings 3435/01, in which Equititrust had obtained an interlocutory injunction restraining Windy Dropdown from dispersing the proceeds of the sale of various lots in respect of which profit share was claimed. Subsequently, that injunction was discharged and an order made that Equititrust pay Windy Dropdown's costs of the application for the discharge. Though brought in a separate proceeding, those applications were in substance interlocutory to the cross-claim that I have heard and determined. To the extent that there are costs of those proceedings not otherwise disposed of, they should be regarded as costs in the cross-claim and I will so order. 18 Finally, in the proof of debt proceedings, it is agreed between Equititrust and the administrators that if I do not order Mr Franks personally to pay the costs of those proceedings, then the administrators should pay those costs out of the deed fund. 19 Accordingly, the costs orders will be, in proceedings 4333/00:

(5) Order that, save insofar as any special costs order otherwise provides, the first defendant Equitiloan Securities pay the costs of the plaintiff Mr Franks, including the costs of the original plaintiff Windy Dropdown Pty Limited, except insofar as they are solely attributable to the case against the third and fourth defendants. (6) Order that the plaintiff pay the costs of the third and fourth defendants solely referable to the defences of those defendants. (7) Order that Windy Dropdown Pty Limited (subject to deed of company arrangement) pay the cross-claimant's costs of the cross-claim. 20 In proceedings 3435/01:

(8) Order that, save insofar as any special costs order otherwise provides, the costs of these proceedings, including any reserved costs, be costs in the cross-claim in proceedings 4333/00. 21 In proceedings 2473/06: (9) Order that the defendants Martin John Green and Peter Krezic in their capacity as deed fund administrators of Windy Dropdown pay the costs of the plaintiff Equititrust out of the deed fund of Windy Dropdown, and their liability pursuant to this order is subject to their indemnity and limited to any available amount in the deed fund of Windy Dropdown. 22 Generally: (10) Order that the costs of the proceedings before me today be costs in the plaintiff's claim in proceedings 4333/00. **********

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