Galati v Deans

Solicitors: Johnson Winter & Slattery (Tenth Cross-Defendant/Applicant on motion) FCB Workplace Law (Cross-claimants/Respondents on motion) File Number(s): 2016/00360462 Publication restriction: Nil

Judgment

1. HER HONOUR: Before me for hearing on 16 October 2018 was an application by the tenth cross-defendant in these proceedings, EJC Pyrmont Pty Ltd (EJC), by notice of motion dated 11 September 2018, raising issues as to the current pleading of the cross-claims made against it and seeking the provision by the second cross-claimant, Fishbank Development Corporation Pty Ltd (FDC) of security for its costs.
2. Following the hearing of the said notice of motion I made directions for the service by the cross-claimants (Mr Robert Deans and FDC) on EJC of any proposed fourth amended statement of cross-claim by 4pm on 26 October 2018 and for EJC to notify the cross-claimants by 4pm on 2 November 2018 whether they oppose the granting of leave for such an amendment (with consequential directions as to the position depending on whether or not such consent was forthcoming). Thus at this stage the fate of the application by EJC for the dismissal and/or strike-out of two particular paragraphs of the current pleading against it cannot yet be determined. Submissions were, however, made as to the prospects of success of the cross-claims in the context of that being a factor that it is accepted would be relevant to take into account on the security for costs application and thus, in that context, it will be necessary in this judgment to consider the claims as presently cast against EJC.
3. These reasons deal only with the application by EJC for security for its costs in the amount of $449,219 (and orders staying the proceedings against it if such security is not provided).

Background

1. The substantive proceedings arise out of a dispute between the plaintiffs (Mr Dominic Galati and Trading Australia Pty Ltd (TA)) on the one hand and the defendants (Mr Deans, FDC and another company, TRHS Pty Limited (TRHS)) on the other, relating to a proposal for the redevelopment of the Sydney Fish Markets at Blackwattle Bay.
2. The following (drawn largely from the submissions by the respective parties on the applications heard by me on 16 October 2018 and by reference to the pleadings) is intended simply as a broad summary of the dispute by way of background to the security for costs application and I do not here make any factual findings as to any disputed matters.
3. For some time since 2001, Mr Deans had been working on a project to develop the Sydney Fish Markets. That proposal involved the proposed acquisition of a property located adjacent to the Sydney Fish Markets in Bank Street (referred to in the third amended statement of cross-claim as the Bidvest Land). FDC entered into an agreement with the owner of the Bidvest Land for the acquisition of rights in respect of that land.
4. In late 2013, Mr Galati became involved in the redevelopment proposal and between 2013 and 2015 Mr Deans and FDC worked with Mr Galati and TA in relation to the proposed development including identifying potential investors for the proposed development.
5. On or about 24 April 2015, FDC and TA entered into a call option and share sale agreement in relation to the shares of Felan's Fisheries Pty Limited (Felan's) (the Share Option Agreement). Felan's was, or had been, a leaseholder in premises at the Sydney Fish Markets and, through another entity, had an indirect interest in Sydney Fish Market Pty Limited, the company which managed and operated the Sydney Fish Markets.
6. The grantor of the option under the Share Option Agreement was Dahua Fish Market No. 2 Pty Ltd, the then registered owner of all the shares in Felan's. There was provision under the Share Option Agreement for the "Buyer" (being FDC and TA) to nominate a nominee to become the registered owner of the shares upon proper exercise of the option. The option was exercisable at any time until 5pm on 20 November 2015.
7. On or about 24 September 2015, TA and FDC entered into another option agreement (the Land Option Agreement), this time with Dahua Fish Market No. 1 Pty Ltd, under which they were granted an option to acquire a parcel of land in the vicinity of the Sydney Fish Market. That option was again exercisable at any time until 5pm on 20 November 2015.
8. The exercise of the respective options was "inter-conditional", each only being able to be exercised if the other was exercised at the same time.
9. Attempts to secure finance for the proposed redevelopment were ultimately unsuccessful and it was apparently decided between the parties (Mr Deans and FDC on the one hand and Mr Galati and TA on the other) at some point prior to 20 November 2015, being the date on which they were due to expire, that it would be necessary to sell the options.
10. EJC's involvement in the transaction seems to have occurred through an introduction, facilitated through TA, by Ms Carolyn Pritchard (who describes herself in an affidavit in the substantive proceeding as a business broker and licensed real estate agent), the principal of Wealth Shift Pty Ltd (WS). EJC is an entity related to a company by the name of Celestino Pty Limited (Celestino) (said in the course of oral submissions to be an indirect parent company of EJC - though recorded in the transcript as "independent" parent company). However, the exact corporate structure is not clear to me - there was also reference to Baiada Pty Ltd as the parent company of EJC. For present purposes, however, nothing turns on this.
11. On 20 November 2015, a Nomination Agreement was entered into pursuant to which TRHS (the third defendant in the substantive proceedings) was nominated to exercise the option contained in the Share Option Agreement and (as pleaded in the main proceeding) Celestino was nominated as the purchaser of, and subsequently acquired, the Bidvest Land (the land the subject of the Land Option Agreement) (see statement of claim filed 1 December 2016 at [27]-[32]). (I note however that what is pleaded in the third amended statement of cross-claim is that EJC was the nominated as the purchaser of the Bidvest Land (see Exhibit A pp 31-48). It is not clear to me how the pleading in the statement of claim at [32] is consistent with the pleading in the third amended statement of cross-claim.)
12. Part of the dispute between the plaintiffs and the defendants in the substantive proceedings relates to the subsequent refusal by Mr Deans and FDC to acknowledge TA's claimed 50% beneficial interest in shares in Felan's (of which TRHS is the registered owner). It is contended by the plaintiffs that the beneficial interest in those shares, which were transferred to TRHS as part of the sale of the Bidvest Land, was held as to 50% by TA and as to 50% by FDC. The plaintiffs allege that Mr Deans and FDC have caused the removal of TA's nominee director on the board of TRHS and now allegedly refuse to acknowledge TA's beneficial interest in the Felan's shares.
13. By their third amended statement of cross-claim, the cross-claimants (Mr Deans and FDC) make various allegations against TA and Mr Galati in connection with the above transactions. Insofar as presently relevant, these include: that Mr Galati and/or TA sought and obtained a "secret commission" from EJC in connection with the sale of the option rights (at [107]); that this conduct was false or misleading within the meaning of the Australian Consumer Law (Competition and Consumer Act 2010 (Cth), Sch 2) (ACL) because of an agreement between the cross-claimants and Mr Galati and TA that there would be no such conduct (at [118]); that by that conduct, TA and Mr Galati each engaged in unconscionable conduct and/or unconscionable conduct within the meaning of the ACL (at 123(i), 123(ii), 123); and that by that conduct, TA breached fiduciary duties owed to each of FDC and Mr Deans respectively (at 123(iii); 123(iv)).
14. The claims against EJC (commencing from [142] of the third amended statement of cross-claim), set out in more detail below, are of direct liability for engaging in misleading or deceptive conduct by making representations that there would be no additional payments or third-party payments payable and no commission claimable or payable to any third party in conjunction with the Nomination Agreement; and by making a false or misleading representation concerning the price payable for land. Except for the representation that there would be no additional payments, which is particularised by reference to conversations at around the time of the Nomination Agreement, those matters are pleaded by reference to the terms of the Nomination Agreement itself (the terms of which, however, are not set out in the pleading). It is alleged that EJC engaged in unconscionable conduct within the meaning of s 20 of the ACL by paying or causing to be paid the sum of $2,279,820.95 to WS and/or by failing to include that amount as part of the consideration pursuant to the Nomination Agreement. It is then pleaded (at [175]) that EJC has aided, abetted, counselled, procured or otherwise induced or been directly or indirectly knowingly concerned in or party to the contraventions of the ACL committed by each of TA, Mr Galati, Ms Pritchard and/or WS.
15. It can thus be seen that the claims made against EJC relate broadly to the financial arrangements entered into between EJC and WS for the payment of commission in connection with the acquisition of the Bidvest Land. The cross-claimants contend, in essence, that a secret commission was received by Mr Galati and/or TA, over and above the purchase price paid for the sale of the rights in relation to the proposed development (see [107] of the third amended statement of cross-claim). The allegation is to the effect that, instead of payment of a purchase price of $24 million to the co-venturers (Mr Deans/FDC on the one hand and Mr Galati/TA on the other hand), the disclosed purchase price was in the order of $22 million and that EJC was invoiced and (through Baiada Pty Ltd) paid moneys totalling $2,279,820.95 (said on the invoice to comprise commission of 2% as well as a fee for property advisory services) to WS; which entity then (unbeknownst to the cross-claimants) paid $1,799,820.95 to TA (who it is said had no entitlement to any payments from WS as WS had performed no services for it in relation to the transaction - WS having acted as a "buyer's agent"). It was submitted by Senior Counsel for the cross-claimants that (T 6.6-6.23): So the substantive claim which we make is that underlying this transaction was the payment of this secret commission or bribe, as it is sometimes called. I have seen the cases of that amount of money without our knowledge. As your Honour will come to hear when we come to deal with the strikeout applications, the information affirming the nature of the transactions and how they took place and they were at the request of and behest of Trading Australia on the one hand and EJC Pyrmont, Mr Wither's client on the other, only came to light in detail once we were served with the affidavit this month, sorry, last month, of Ms Pritchard, who in fact has done a mea culpa and filed an affidavit saying: This is how it all took place; I was instructed to do X; I was instructed to do Y. These documents which we now tender establish the transactions through the bank. Ms Pritchard says it in her affidavit, but we didn't have the documents. These are the documents that make that good. They demonstrate the payment to Wealth Shift, the agent of 2.7 or of 2.89 million on 8 December and on payment immediately afterwards to Trading Australia, our co‑vendor, of $1.79 million. That is the relevance. I demonstrate the strength of our case against EJC and its knowing involvement and we come to the question of the strikeout of the two paragraphs.
16. The documents to which reference was there made (Exhibit 3) demonstrate the payment and receipt of the various amounts; as well as evidence that the description and amount of those moneys, as invoiced by WS, changed at the direction of EJC (Ms Pritchard's affidavit deposes to the changing of invoices in accordance with instructions from Mr Vassallo, the Chief Executive Officer of EJC).
17. The proper characterisation of those financial arrangements is a matter in dispute and certainly it would be inappropriate here to express any view as to that issue. Counsel for EJC submitted that one could see a totally innocent explanation for the conduct to which the cross-claimants point: That is to say that EJC and Mr Vassallo hold the view at the relevant time that they're making a payment from their own funds to Wealth Shore (as said) [WS] and to Trading Australia. It's got nothing to do with Mr Deans; therefore, he doesn't need to be troubled with any of that. Likewise, they provide the warranty in the clause 10 of the nomination agreement, so that he is given sufficient assurance that nobody's going to be looking to him to pay a vendor's commission.
18. EJC has obviously not yet had an opportunity to adduce any evidence in response to allegations of this kind (indeed the complaint made as to the current pleading is that there is no allegation of the material facts supporting the contention of knowledge of the alleged contravention for which it is said EJC is accessorially liable; and I note there is no reference in the pleading - no doubt because evidence of this emerged only in Ms Pritchard's affidavit - of any agreement between Mr Vassallo and Ms Pritchard as to the arrangements for payment of the commission). Suffice it at this stage to say that this forms a central plank in the cross-claimants' claims against EJC.
19. Turning back to the allegations made against EJC in the current pleading, the cross-claimants allege (at [150] of the third amended statement of cross-claim) that TA and EJC represented to them on or about 20 November 2015 that: …all of the terms of the proposed sale of the option rights then held in the names of TA and FDC were to be part of the shortly to be executed and exchanged Nomination Agreement and that there would be no additional payments or third-party payments besides what was documented in the sale documentation.
20. This is defined as the "EJC No Side Payments Representation". It is particularised at [150] by reference, inter alia, to a telephone conversation between the solicitor acting for Mr Deans and FDC and a solicitor acting for EJC.
21. A further representation is pleaded at [154], defined as the "EJC No Commission Payment Representation", by reference to a warranty provided in cl 10 of the Nomination Agreement (pleaded at [151] as a warranty by EJC that it had not been introduced to TA and FDC or to the property the subject of the Nomination Agreement by any real estate agent other than the Nominating Agent (Deans Property Pty Ltd)). At [154], it is alleged that the warranty provided in cl 10, together with the definition of the Nominating Agent was a representation that: a) Deans Property Pty Ltd, and no other person, had introduced EJC to the property; and b) by virtue of that introduction, no commission would be claimable by or payable to any third party[.]
22. Clause 10 in the Nomination Agreement (Exhibit A, p 40) provided as follows: 10 Warranty as to Introduction 10.1 The Property Purchaser warrants that it was not introduced to the Grantee or to the Property by any real estate agent other than the Nominating Agent. 10 2 The Property Purchaser agrees to indemnify the Grantee (or any one of them) for any expenses (including legal costs on a solicitor and own client basis) and payments (including a payment in the nature of a commission) which the Grantee incurs or is ordered to or otherwise reasonably makes as a consequence of a breach of the warranty given by the Property Purchaser pursuant to Clause 10.1.
23. Reliance by the cross-claimants on both the "EJC No Side Payments Representation" and the "No Commission Payment Representation" is pleaded at [157] of the third amended statement of cross-claim.
24. At [158] of the third amended statement of cross-claim it is alleged that on or about 3 December 2015, WS issued EJC with an invoice "for purported sales commission for Wealth Shift for the sale and negotiation of [the Bidvest Land] in an amount of $2,279,820.95" and that this was paid (by Baiada Pty Ltd) to WS on 8 December 2015 ([159]). At [161] it is alleged that on or about 3 December 2015, TA issued a tax invoice to WS for $1,799,820 95 for property advisory services, which was then paid by WS from the funds which had been paid to WS from Baiada Pty Ltd. (Tendered on the application before me (Exhibit 3), as adverted to above, were documents produced on subpoena disclosing the transfers of funds.)
25. At [163] of the third amended statement of cross-claim it is alleged that: The payment of the WS Commission had the effect that the price paid by EJC for the rights under the Nomination Agreement was understated by the amount of the WS Commission[.]
26. It is alleged that as a result of the said reliance, FDC and Mr Deans suffered loss and damage ([164]).
27. At [165] it is alleged that, by reason of the matters pleaded at [142]-[164], EJC engaged in misleading or deceptive conduct within the meaning of s 18 of the ACL and, at [166], that by reason of those matters EJC made a false or misleading representation concerning the price payable for the land the subject of the Nomination Agreement in breach of s 30(1)(c) of the ACL.
28. At [169] it is alleged that, in the premises of the matters pleaded at [142]-[164], by paying or by causing the WS Commission to be paid to WS and/or by failing to include the amount of the WS Commission as part of the consideration pursuant to the Nomination Agreement, EJC engaged in unconscionable conduct within the meaning of s 20 of the ACL; as a result of which the same loss and damage is alleged to have been suffered by FDC and Mr Deans as that pleaded at [164] (see [172]).
29. At [175], it is alleged that: Further, or in the alternative, in the premises of the matters pleaded at paragraphs 107, 142 to 164 and 169 to 172 hereof EJC has aided, abetted, counselled or procured or otherwise induced or been directly or indirectly knowingly concerned in or party to the contraventions of the [Competition and Consumer Act] within the meaning of section 75B of the [Competition and Consumer Act], in respect of each of the claims of misleading and deceptive conduct and/or representations and/or claims of unconscionable conduct under the ACL which are pleaded against: a. TA and/or Galati in paragraphs 107, 118, 123(t)(A)(ii) and (B)(ii), 150, 154, 161 and 162 [of the third further amended statement of cross-claim]; b. Pritchard and/or Wealth Shift in paragraphs 158, 159, 162, 167, 168, 170 and 171 [of the third further amended statement of cross-claim].
30. As already noted, the payment of $2,279,820.95 by EJC to WS was described in oral submissions as akin to a secret commission for which a claim in money had and received would lie (though no such claim has been pleaded as against EJC), it being said that EJC was complicit in the conduct complained of on the part of TA and/or Mr Galati and that EJC itself "as buyer made the improper payment, the secret commission, paid it and is liable as a principal" (reference being made to the decision of the Privy Council in Mahesan v Malaysia Government Officers' Co-operative Housing Society Ltd [1979] AC 374 (Mahesan) at 381 per Lord Diplock in that regard as authority for the proposition that where a secret commission is paid the person who suffers loss can recover, not just from the payee, but from the payer as well - see the discussion at T 28.45-29.5).
31. Pausing here, I note that there is no claim of the kind considered in Mahesan that is presently made against EJC in the pleadings (though, as noted earlier, there is a claim to the effect that TA and/or Mr Galati obtained a secret commission - see at [107]); and that [154] and [175] of the third amended statement of cross-claim are the subject of EJC's strike-out/dismissal application, the fate of which cannot yet be determined. However, reliance was placed by the cross-claimants on the evidence of receipt of the $2,279,820.95 payment for the proposition that their claim against EJC is a compelling one, that being one matter by reference to which they resist the claim for security for costs, to which I now turn.

Application for security for costs

1. Prayer 3 of the notice of motion filed 11 September 2018 by EJC seeks an order pursuant to rule 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) or alternatively s 1335 of the Corporations Act 2001 (Cth) that FDC pay security for the costs of EJC in the amount of $449,219 (or in such other amount as deemed appropriate) within 14 days by paying that amount into Court or by way of an unconditional bank guarantee in a form and from an institution acceptable to the Registrar. Prayer 4 seeks an order that the cross-claim be stayed in the event that FDC fails to provide security for costs by the time and in the manner required by the Court.
2. EJC's solicitor, Mr Piesiewicz, has sworn an affidavit dated 11 September 2018 estimating EJC's costs of the proceedings (including counsel fees and other disbursements) at $602,540 (on the basis of an assumption as to a 5 day hearing). That estimate includes costs incurred to date of $75,000 and an estimate for the costs of various of the future stages of the matter in preparation for, and in the conduct of, a final hearing. Mr Piesiewicz estimates the solicitors' costs component of that estimate (excluding all disbursements) to be $438,060. On the assumption that solicitor/client costs would be discounted on assessment by 35%, he notes that that component would be reduced by $153,321. It is on that basis that EJC seeks security in the sum of $449,219 (being $602,540 in total estimated costs and disbursements less $153,321). (Of course, if the cross-claimants' cross-claim is now to be further amended this would presumably have an impact on the overall costs.)
3. The cross-claimants' solicitor, Mr Robinson, has affirmed an affidavit on 19 September 2018, taking issue with various aspects of the estimate of EJC's recoverable costs (his estimate of those recoverable costs, calculated at the lower charge-out rates of another commercial law firm in Sydney, being $325,281).
4. Relevantly, FDC accepts that it would be unable to pay the costs of EJC, if ordered to do so, unless it succeeded against TA and/or Mr Galati (see Mr Robinson's affidavit affirmed 19 September 2019 at [10]; and see the cross-claimants' written submissions on this application). This being acknowledged, Mr Deans (who is a defendant in the substantive proceedings and a co-cross-claimant) and his wife, Ms Sharon Deans (who is not a party to any of the proceedings), have each indicated (see Mr Robinson's affidavit affirmed 9 October 2018 at [17]-[18]) their willingness to proffer undertakings (which it was confirmed would be undertakings to the Court) in the following terms (see Annexure O and Annexure P to Mr Robinson's 9 October 2018 affidavit): I undertake, jointly and severally with [in Mr Deans' case, my wife Sharon Louse Deans or, in Ms Deans' case, my husband Robert Paton Deans], to be responsible for payment of such costs, duly assessed, as may be ordered by the Court in these proceedings to be paid by Fishbank Development Corporation Pty Ltd in favour of EJC Pyrmont Pty Ltd.
5. Added to such undertakings, in the course of oral submissions, was an undertaking by each of Mr Deans and Ms Deans not to dispose of, or further encumber, their respective assets (T 58.28-58.31).
6. EJC submits that the undertakings that Mr Deans and his wife are prepared to give do not overcome the difficulty that FDC may ultimately be unable to satisfy any substantial costs order made against it on the cross-claim in these proceedings and presses for an order for security for costs to be made notwithstanding the undertakings that have been proffered.
7. In its written submissions, EJC included an analysis of the financial position of each of Mr Deans and his wife, based on the information to which Mr Robinson has deposed in his 9 October 2018 affidavit. It is submitted that there are a number of deficiencies in that affidavit which create uncertainty as to the current and future financial position of Mr Deans and Ms Deans. I do not propose to delve into those perceived deficiencies. Suffice it to note that EJC submits that, at best, it could be said that Ms Deans has net assets of $1,042,511.88 and that Mr Deans has net assets of $724,511. Therefore, it is appropriate to proceed on that basis and to test the worth of the undertaking in that regard.
8. In its written submissions, EJC submitted that there were six reasons why undertakings in the form contained in Mr Robinson's affidavit (which, it should be noted, did not at that stage include the undertaking not to dispose of or further encumber the Deans' respective assets) are inadequate. Although some of those seem to have been addressed by the instructions conveyed to the Court by Senior Counsel for the cross-claimants on the hearing of the application, it is useful to summarise those six reasons.
9. First, complaint was made that the undertakings were not framed as an undertaking to anyone and it was said that, if construed as undertakings to EJC, they would only operate inter partes (with the difficulty that they would not give EJC any kind of security over the Deans' assets). That complaint has been met by the confirmation by Senior Counsel for the cross-claimants that the proffered undertakings will be undertakings given to the Court (which, though still not providing security as such over the assets, would carry the sanction of contempt in the event of non-compliance).
10. Second, complaint was made that the undertakings did not include any undertaking on the part of Mr Deans and Ms Deans not to dispose of or deal with their assets. Hence it was said that there would be nothing to prevent the Deans from using their assets (say, to meet the legal fees incurred and to be incurred by the cross-claimants in defending the substantive proceedings and in prosecuting the cross-claim). It was noted that there had been no evidence put before the Court as to the cross-claimants' fee arrangements with their legal representatives (and EJC submitted that a Ferrcom inference (see Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389) could thus be drawn that such evidence would not have assisted FDC on the question of the ability to pay an adverse costs order). This complaint, too, has now been met (by the express addition to the proffered undertakings to encompass an undertaking not to dispose of or further encumber assets).
11. Third, EJC raised the spectre that Mr Deans might be unsuccessful in his defence of the proceedings brought against him by Mr Galati and TA, and hence that he might be exposed to adverse costs orders in his own right in the substantive proceedings (together with the legal fees he will incur to his own legal representatives in the conduct of those proceedings).
12. In this regard, Counsel for EJC pointed to correspondence between EJC's solicitors and the solicitors acting for TA and Mr Galati, in which there is an estimate that TA and Mr Galati have incurred professional fees and disbursements in these proceedings to date in the amount of $571,008 and expect to incur further fees and disbursements in the amount of $1,351,800 (i.e., about $1,922,808 in total (Annexure N to the affidavit of Mr Piesiewicz of 15 October 2018)). It is submitted for EJC that even if TA and Mr Galati were only to recover 70% of those fees and disbursements, the costs exposure of Mr Deans and FDC would be in an amount of around $1,345,965 (and hence that, with Mr Deans and FDC's own costs of the preparation and conduct of the trial, this would substantially erode the assets available to meet EJC's costs). The response to this by the cross-claimants, in essence, is that it is speculation to engage in an assessment of the worth of the undertakings (particularly that of Ms Deans) by reference to potential costs orders that other parties might obtain against the cross-claimants in their capacity as defendants in the substantive litigation. I refer to this issue in due course.
13. Fourth, it is submitted that there are real questions about the enforceability of any contractual promise made by Ms Deans to pay the costs incurred by FDC in this litigation since Ms Deans is neither a director nor a shareholder of FDC. It is submitted that there is no evidence to explain what interest Ms Deans has in offering what is in effect a guarantee of FDC's liabilities and no evidence that she has obtained any legal advice in relation to the provision of the undertaking and confirming that she has given it voluntarily and absent the influence of her husband. That complaint is met by the confirmation that the undertaking proffered by Ms Deans is to be an undertaking to the Court, hence the contractual enforceability of the undertaking does not arise.
14. Fifth, it is submitted that if Ms Deans is providing the undertaking because she is a person who stands to benefit from the litigation (as to which, I note, there is no evidence), then she is also at risk of a third party costs order being obtained against her by other parties to the proceedings (if Mr Deans and FDC are unsuccessful in the substantive proceedings) and therefore there is a significant risk that the assets held in her name will be insufficient to meet all of the costs orders that might be made against her. The cross-claimants' response to this, again, is in effect that this is no more than speculation. I will come back to this issue shortly.
15. Sixth, it is submitted that "if it is truly the case that Mr Deans and Ms Deans have substantial net assets" then there is no reason why they could not draw upon those assets to make a payment of security into court or by way of a bank guarantee in the amount sought by EJC. (On that issue, it seems to me that there may be a number of reasons why an individual might prefer to proffer an undertaking to the Court in lieu of the provision of security in the form of cash or a bank guarantee - particularly where the litigation in relation to which the undertaking is proffered is not likely to be heard for some time - but in any event it is speculation to engage in such an exercise.)
16. Reference was made to In the matter of Australian Style Holdings Pty Ltd as trustee of The Australian Style Investments Unit Trust [2018] NSWSC 1368 (Australian Style Holdings), where Black J considered the import of an undertaking to the Court in respect of costs on the question whether an order for security should be made. The submission had there been made, by Counsel for the party seeking security, that there would be nothing to constrain the party providing the undertaking in that case from disposing of its assets before the time at which enforcement of the undertaking could be sought, but his Honour did not need to address the question whether it would be implicit in the giving of the undertaking that that could not occur (nor the ultimate proffering of an undertaking that that would not occur), given the conclusions his Honour had reached on other grounds.
17. What EJC relies upon for present purposes is that Black J proceeded to analyse whether there was support in the evidence for the view that an undertaking proffered by an individual was of any substantial value to the parties seeking security (at [25]-[28]). His Honour noted (amongst other things) the evidence that the legal costs of the litigation had been a severe strain on that individual's personal resources, and that he did not have a predictable income (also at [25]). His Honour concluded (at [28]) that the undertaking there proffered was not sufficient to displace the need for a security for costs order.
18. In response, FDC submitted that, unlike in Australian Style Holdings, here there is no evidence of a strain on the resources of Mr or Ms Deans, nor of limitations on the earning capacity or any difficulties experienced by either of them in paying costs; and that the decision of Black J therefore does not take the matter any further.
19. FDC resists the application for an order for security for costs. It argues that such an order should not be made for two main reasons.
20. First, it submits that the prospects of success of the cross-claimants' claim against EJC are high. While it accepts that the whole of the evidence is not before the Court, it points to the contemporaneous documents in Exhibit 3 on this application (being a bank statement and two journal reports of payment processes produced by the bank on subpoena) and to the affidavit sworn by Ms Pritchard in the substantive proceedings as support for that contention. FDC accepts that the strength of its case is not a determinative factor but submits that it is an important factor weighing against an order for security (referring to Live Board Holdings Ltd v Cody Live Pty Limited [2017] NSWCA 302 at [99], where the Court of Appeal stated that statements in some of the authorities that the strength of the case is a neutral factor should not be understood as denying an ability on the part of the Court, in an appropriate case, to rely on its assessment of the strength or weakness of the case in granting or refusing security).
21. Second, it points to the fact that both Mr Deans and his wife have offered to make their assets available to meet any costs order made against FDC in favour of EJC. The cross-claimants accept that availability of the assets of a personal co-claimant may not of itself be fatal to an application for security but submit that this is a highly relevant factor pointing against an order for security (referring to Prynew Pty Limited v Nemeth [2010] NSWCA 94 at [37], [39], [44]-[47] (Prynew); Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245 at [34]). Thus the ultimate submission made by FDC in this regard is that the proffering of undertakings (while not determinative against an order for security) is an important and influential factor.
22. As to the undertakings themselves, it is submitted by FDC that it is not a pre-condition to acceptance of such an undertaking that the person proffering the undertaking also undertakes not to encumber or dispose of assets but in any event (as noted earlier) the Deans are prepared to add to the undertakings a proviso or a further undertaking that they will not dispose of, or further encumber, their assets without giving notice to EJC's solicitors of any intention to do so (seven days' notice being suggested in that regard). It was submitted that, with that addition to the undertaking, EJC's position is entirely protected because the Deans' net assets (on EJC's calculation) together are in the amount of about $1.75m and EJC's estimated costs on a party/party basis are in the order of around $450,000. Thus it is submitted that the proffering of the Deans' undertakings, supported by personal assets of that order, when added to the prima facie merits of the cross-claim, provides a powerful reason not to order security for costs.
23. As to the other matters raised by EJC, FDC argues that there should not be speculation as to what the costs of other parties to the proceedings might be when assessing the value of the undertakings that have been proffered and that it is not incumbent on the cross-claimants to adduce evidence as to their own estimated costs of the proceedings. It emphasises that what has been offered are undertakings by the Deans that are supported by $1.75 million worth of assets to cover what, on EJC's own estimate, is around a $450,000 cost exposure. It is submitted that if the spectre of other parties' costs is to be taken into account, one would need to speculate that they would absorb some $1.3 million of net assets before that would lead to the point of rejecting FDC's submissions and ordering security.
24. Thus it is submitted that the present case is one where a personal cross-claimant, who is not impecunious, has come forward and is prepared to be responsible for an adverse costs order against FDC (as has that cross-claimant's wife) and that this is not an appropriate case for an order for security.
25. If, contrary to FDC's position on this application, security is to be ordered, FDC submits that any order for security should initially be limited to a first tranche to allow for the completion of interlocutory steps; after which the position may be reviewed.

Determination

1. The principles applicable on an application for security for costs are well known, whether that application be one made under r 42.21(1)(d) of the UCPR or under s 1335 of the Corporations Act. Here, the application is made by reference to both sources of power, in the alternative.
2. Rule 42.21(1)(d) of the UCPR provides, relevantly: (1) If, in any proceedings, it appears to the court on the application of a defendant: … (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, … … the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given.
3. Section 1335(1) of the Corporations Act provides: Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.
4. In both contexts, "plaintiff" includes a cross-claimant (Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301 at 306; Winnote Pty Ltd (in liq) v Page (2005) 64 NSWLR 244 at [18]; [2005] NSWCA 362; and note s 3(1) of the Civil Procedure Act 2005 (NSW)).
5. The threshold question (as to whether there is reason to believe that FDC would be unable to pay EJC's costs of defending the cross-claim if it were to be ordered to do so), as to which EJC bears the onus (see Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at [17], [56]-[59]; (2014) 98 ACSR 301) involves an "undemanding test" (see Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93 at [15]-[16]; Cornelius v Global Medical Solutions Australia Pty Ltd at [57]-[60]; In the Matter of Felan's Fisheries Pty Limited [2016] NSWSC 1351 at [10]). It has been said that the Court should adopt a "practical commonsense approach" to the examination of the financial affairs of the corporation (Wollongong City Council v Legal Business Centre Pty Ltd at [28]). This issue may be disposed of quickly in the present case. The test can be taken here to have been satisfied in light of the concession by FDC to which I have referred above.
6. The next issue to be considered is whether, in the exercise of the Court's discretion, security should be granted. There is said to be an evidentiary onus on the part of the party from whom security is sought to establish a reason why security should not be granted (see Wollongong City Council v Legal Business Centre Pty Ltd (at [30]) and Cornelius v Global Medical Solutions Australia Pty Ltd (at [18]-[20])).
7. As noted in submissions in the present case, a number of discretionary considerations have been identified as relevant in this context in the decision of Beazley J (as her Honour then was) in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 (at 196-198). Those matters are now largely reflected in amendments to r 42.21 of the UCPR which came into effect on 9 August 2013.
8. I turn then to the (non-exhaustive) considerations set out in r 42.21(1A) of the UCPR.
9. First, as to the prospects of success and genuineness of the proceedings (r 42.21(1A)(a)-(b); and see KP Cable Investments Pty Ltd v Meltglow Pty Ltd (at [197]) and Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 (at 514)), it has been said that, as a general rule, where a claim is prima facie regular on its face and discloses a cause of action then, in the absence of evidence to the contrary, the Court should proceed on the basis that the claim is bona fide and has reasonable prospects of success (KP Cable Investments Pty Ltd v Meltglow Pty Ltd at [197]).
10. In the present case there is no submission to the effect that the proceedings are not genuine and both parties accept as a matter of law that the prospects of success or merits of the cross-claim may properly be taken into consideration. As noted above, this is a factor on which FDC placed some weight. EJC, on the other hand, submits that in the present case it is a neutral factor, in circumstances where there is an evidentiary vacuum and where, on one view of the facts to which the cross-claimants point, there may be a totally innocent explanation.
11. I do not consider that I am in a position, based on the pleadings or the material to which I was taken on this application, to form a sufficient view as to the prospects of success of the cross-claim against EJC to warrant a conclusion that this is a factor that points against the grant of security. I accept the submission made for EJC that it is a neutral factor.
12. The next factor listed in r 42.21 is the impecuniosity of, here, the cross-claimant (r 42.21(1A)(c)). This not only enlivens the Court's discretion under s 1335 of the Corporations Act but has been recognised as a substantial factor favouring the exercise of the discretion to order security (see Idoport Pty Ltd v National Australia Bank Limited [2002] NSWCA 271 at [40] (Mason P); Tyneside Property Management Pty Limited v Hammersmith Management Pty Ltd [2013] NSWCA 404 at [18] (Sackville AJA)). In the present case, as noted, FDC accepts that it may be unable to meet an adverse costs order against it and in favour of EJC. This is therefore a factor that points towards the grant of security. (And there is no suggestion that the impecuniosity is attributable to any conduct on the part of EJC - which is the next factor relevant to be taken into consideration under r 4.21(1A)(d).)
13. Another factor is whether, as cross-claimant, FDC is effectively in the position of a defendant (r 42.21(1A)(e)). That is not suggested here to be the case. Nor is it suggested that any of the factors set out in rr 42.21(1A)(f)-(i) is here applicable.
14. The next factor that is raised in r 42.21(1A) (under (j)), is as to the costs of the proceedings (here, the cross-claim). The fact that a party is likely to incur significant legal costs in defending the claim, and will be unprotected if no order for security is made, is a consideration which may favour the making of an order for security (see Porter v Gordian Runoff Limited [2004] NSWCA 171 at [13]).
15. I do not propose here to go into the details of the costs estimate provided by Mr Piesiewicz or to the criticisms made of aspects of it by Mr Robinson. The steps to be taken in the preparation and conduct of the hearing seem not unreasonable and the differences in quantum of the estimates do not lead me to conclude that the former's estimate is of itself unreasonable. Moreover, the estimate has been given for a five day hearing, which may well prove to be conservative even if EJC's level of representation throughout the balance of the hearing (leaving aside that part devoted to the cross-claim against it) does not require the same level of appearance as does the cross-claim itself (as Mr Robinson has suggested).
16. I accept that if the trial of cross-claim proceeds together with the trial of the balance of the proceedings, there will be a need for EJC and its legal representatives to review and understand the evidence given by the parties in the balance of the proceedings and that there is an obvious overlap in some of the issues as between the substantive claims and this cross-claim (not least being the issue as to the "secret commission" or "extra commission").
17. As to the remaining factors listed in r 42.21(1A) (at (k)-(n)), it was not suggested that these were applicable or weighed one way or the other in the consideration as to whether to order security for costs in this case.
18. That brings me to what I consider to be the decisive factor in the present case and that is the proffering of the undertakings by Mr Deans and his wife. At the outset, I accept that the proffering of undertakings as such is not of itself determinative, as a matter of principle; rather it is relevant to consider the worth of the undertakings against the exposure to costs that is faced by the party seeking security for those costs.
19. That is the position that follows having regard to the present state of the authorities as to the relevance of such an undertaking (see, in particular Wollongong City Council v Legal Business Centre Pty Ltd (Beazley JA (as her Honour then was), with whom Barrett JA agreed); Prynew (Beazley JA at [44]-[45]); Jazabas Pty Ltd v Haddad [2007] NSWCA 291; 65 ACSR 276 (the majority view expressed by Mason P and McClellan CJ at CL in that case being preferred in Prynew); Epping Plaza Fresh Fruit and Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 at 198; [1999] VSCA 43 (Winneke P and Phillips JA); Westpac Banking Corporation v Southern Environmental Services Pty Ltd [2017] NSWSC 626 at [58]-[60] (Adamson J).
20. Balancing the factors referred to above, and taking into account that the Deans have proffered undertakings to the Court supported by assets that, if called upon, would more than amply meet the exposure anticipated in respect of an adverse costs order against FDC and in favour of EJC on the cross-claim, I am of the view that the discretionary matters referred to above point strongly against an order for security for costs being made at this stage.
21. I do not accept that it can be inferred, simply because Ms Deans has been prepared to provide an undertaking of the kind now proffered, that Ms Deans has an interest in the outcome of the litigation (beyond the obvious interest a wife might be presumed to have in the favourable outcome of litigation to which a spouse or close family member is a party) and hence I am by no means persuaded that there is a real risk of a potential third party costs order against her. In those circumstances, her net assets would comfortably meet an adverse costs order of the magnitude that has been assessed by EJC as its costs exposure at this stage (leaving aside altogether the net assets of Mr Deans). As to the costs that Mr Deans and FDC are likely to incur in respect of the conduct of their own defence of the substantive proceedings (and the concern expressed for EJC that they might need to borrow against Mr Deans' assets to fund those costs), the position of EJC is in effect protected by Mr Deans' undertaking not further to encumber or dispose of his assets without first having given notice of his intention to do so.
22. Had I been of a different view, I would have ordered the provision of security in tranches. I accept that that would have been appropriate in circumstances where the matters to be involved in the preparation of the case for trial have not been finally determined (and there is still an issue as to the pleading of the cross-claim itself). In that regard, I would have provided for the solicitors' costs incurred to date, and for costs associated with amendments to the pleadings (though they would likely be covered by an order for costs thrown away by the need to replead in any event) and for preparation of lay evidence but not further costs at this point. The ambit of any discovery is yet to be determined and the extent of further interlocutory hearings or directions hearings cannot yet be known. As to a potential mediation, I understand there has already been a failed mediation and it is not clear that there is as yet any further proposal for a mediation. Therefore, at most I would have ordered the provision of say 65% of the amount claimed for solicitors' costs to date and evidence (as per Mr Pieseiwicz's affidavit at [82]) (65% of $109,100), together with an additional amount (say $10,000) for re-pleading/directions. (The fact that I would have ordered only a limited amount as security at this stage also points to the acceptability of the undertakings that have been proffered.)

Orders

1. For the above reasons I make the following order: 1. Subject to the filing in Court within 7 days of signed undertakings by each of the first cross-claimant and his wife, Ms Sharon Louise Deans, in the form annexed to the affidavit affirmed 9 October 2018 of Matthew Nicholas Robinson but with the additional undertaking articulated by Senior Counsel for the cross-claimants in the course of the hearing of the tenth cross-defendant's application for security for costs (and without prejudice to the ability of the tenth cross-defendant at a later stage to make any further application pursuant to rule 42.21(1) of the Uniform Civil Procedure Rules (NSW) and/or s 1335(1) of the Corporations Act 2001 (Cth) for security to be provided by the second cross-claimant, Fishbank Development Corporation Pty Limited), 1. dismiss the tenth cross-defendant's present application for security for costs; and 2. order that the costs of the tenth cross-defendant's application for security for costs be costs in the cause.

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: 24 October 2018