Galati v Deans

Determination

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.
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.
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.
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)).
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.
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])).
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.
I turn then to the (non-exhaustive) considerations set out in r 42.21(1A) of the UCPR.
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]).
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.
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.
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).)
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.
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]).
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).
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").
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.
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.
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).
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.
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.
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.)

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