Globus Investments v William

Supreme Court of NSW|2016-05-10|Before: Campbell J

Solicitors: Colin Biggers & Paisley (Plaintiff/Respondent) Kennedys (Defendant/Applicant) File Number(s): 2014/196787

ex tempore Judgment (revised)

First Issue

The parties agree that the relevant considerations for an order for the exercise of a discretion to make an order for security for costs, whether arising under s 1335 of the Corporations Act 2001 (Cth) or under r 42.21 of the Uniform Civil Procedure Rules are relevantly the same.
The defendant seeks to engage the Court's discretion by demonstrating that there is reason to believe that the plaintiff company will be unable to meet any costs order in favour of the defendant if the defendant is in due course successful in the litigation. There does not, with respect, seem to be much issue about that. It is now common ground that the plaintiff company is a "$2 company" whose principle business activity is to act as the trustee for the Pukanic Trading Trust. Some financial and tax records relating to the trust have been tendered as exhibits A and B. It is apparent on the face of those documents, bearing in mind that they are prepared for specific purposes other than litigation, that the company has no obvious assets or source of income of its own from which it could promptly pay a costs order if one was made against it.
From the trust tax return for the 2015 financial year it is apparent that the trust has been recording losses for tax purposes for a number of years which had accumulated, in the 2015 financial year, to in excess of $1.1 million. I interpolate that it may be relevant to note that the loss for the 2012/2013 year is $227,993, much higher than any other year. During that year the plaintiff and defendant were in their commercial relationship.
From the financial statement it is apparent that as at the year ended 30 June 2015 the plaintiff company had about $9,500 in the bank and recorded liabilities in a sum of a little over $1.8 million. It is also relevant to record that those liabilities are particularised as "loans from other persons". Although the copy of the financial records admitted as exhibit A is unsigned, I record that in the opinion of the directors, in accordance with the requirements of the corporations law, I am invited to infer, there were reasonable grounds to believe that the trust will be able to pay its debts as and when they become due and payable.
From the amount of the loans from unnamed persons and the declaration of solvency I infer that there are persons of substantial means standing behind the corporation. Those persons are not otherwise identified in the evidence before me and I will not speculate about their identity. I do record, however, that no undertaking as to the defendant's costs has been proffered by those persons.
On the basis of that evidence, I am satisfied that this is an appropriate case for the Court to consider whether an order for security ought be made.

Second Issue

Counsel also agree that, as the language of the rule makes clear, the list of relevant factors set out in r 42.21(1)(a) is not exhaustive, nor is it necessary for me to refer to each of those factors. Rather, it is sufficient if in weighing up whether an order should be made, I refer to the matters upon which counsel have placed particular reliance. I will not deal with them in any particular order.
Counsel also accept that no one factor in the circumstance of this case is likely to be of determinative significance, rather, all relevant factors should be weighed in an overall evaluation of the question of whether the order sought by the defendant should be made.
The first relevant consideration put by the defendant is that the plaintiff's case is relatively weak. Although a number of factors are pointed to by Mr Afshar, in particular he drew my attention to the evidence of Dr Coker which indicated that his opinions were based upon an assumption that the plaintiff would need to expend about $1 million in intensive marketing in the initial, or start-up, phase of the business to produce the type of revenue he projects of about $222,000 per month, or $2.6 million per year.
A director of the plaintiff company, Mr Martin Pukanic, at [174] of his affidavit, confirmed that Globus had "budgeted to spend $1 million on marketing within the first twelve months of the launch in order to maximise user engagement and public knowledge of the site". This is considered by Dr Coker to be an essential requirement of the successful start-up of the business. He assumes that would have happened (at [16] and at [29]) and explains his methodology of establishing a "conversion rate" which, as I understand it, is the successful conversion of the number of persons visiting the site into sales, by reference to that assumption. The simple point made by counsel is that on the evidence led as to the means of the plaintiff, it simply, in my terms, was not good for that money.
In response to that Mr Peadon points out that there are apparently well-heeled backers and that in any event in such a commercial environment the capital would be raised from either private equity sources or, perhaps, from financial institutions.
I bear in mind what Austen J said in Fiduciary v Morningstar Research [2004] NSWSC 664; 208 ALR 564 at [38]. His Honour indicated that the most relevant consideration is whether the plaintiff's claim is bona fide and has reasonable prospects of success. Given the nature of an interlocutory application of this type, it was not appropriate that the Court "embark upon a more detailed consideration of the merits".
Doubtless in this case there will be a significant issue of primary fact between lay witnesses as to the circumstances giving rise to any liability. Equally so there may well be a conflict of evidence between experts. The case involves not only the loss of opportunity that I have referred to but also the recovery of the reliance costs albeit of a more modest type. The lost opportunity damages will of course be assessed in accordance with the approach referred to in Malec v J C Hutton Pty Ltd [1990] HCA 20; 169 CLR 638 and Sellars v Adelaide Petroleum N L [1994] HCA 4; 179 CLR 332.
Although I am satisfied there is likely to be a very hot contest between the parties at trial, both on liability and quantum, I am also satisfied that the plaintiff's claim is bona fide and has a reasonable prospect of success. It is not necessary for me to better assess its relative strength and weaknesses for present purposes.

The third issue

The next factor which was dealt with by counsel was the question of delay. Mr Peadon argued that it arose in different ways in the particular circumstances of this case. He pointed out that the proceedings were commenced in July 2014 and it was not until September 2015 that any question about the financial viability of the plaintiff, and about security for costs, was raised. The history of the litigation in the iterim is fully set out in the affidavit of Marco Gianni Chiarella sworn on 22 February 2016, which is not contested. Mr Chiarella is a solicitor who had the day to day conduct of the matter under the supervision of the solicitor for the plaintiff.
It is quite clear that between the commencement of proceedings on 3 July 2014 and the question of security arising in September 2015, the proceedings were subject to considerable case management in the District Court of New South Wales and about $67,000 in costs were incurred by the plaintiff in that period. Much of that forensic effort was taken up with the plaintiff resisting the defendant's attempts to amend its defence to withdraw admissions that had been made either expressly or by implication in a defence filed when the defendant was, for a time, self-represented. After he instructed his former solicitors, Baker McKenzie, efforts were made, ultimately very largely successfully before Nielson DCJ on 6 February 2015, to withdraw the admissions.
Between February and September the matter was subject to yet further case management. Because of the complexity of the plaintiff's claim, it was necessary for there to be a number of extensions to the timetable for the preparation and service of lay and expert evidence. That was eventually completed by 5 August 2015. The matter was before the District Court again on 6 August 2015 when orders were made by consent for the defendants to file their evidence by 30 October 2015.
From the evidence filed and served on 5 August 2015 it became apparent that the plaintiff's claim was of much greater proportions than initially claimed. It is not quite explained but following the service of the evidence the defendants changed solicitors to their present solicitors, Kennedys, who, on 8 September 2015, wrote to the plaintiff's solicitors raising a number of questions including the financial viability of the plaintiff and the question of security. From that time on the issue was on the table although an application was not filed until 27 November 2015. In the meantime the date for the defendant to provide its evidence was extended until February of this year. However, although the lay evidence has been served in April, expert evidence is still pending.
Mr Peadon relied upon what was said by Wadell J in Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 125.B. His Honour referred to a number of authorities and pointed out that there were cases where the defendants' delay had been such that they were regarded as having waived their right to security. Those cases involved what was referred to as "gross delay" but his Honour identified the true factor being the defendant permitting the plaintiff to prepare for trial and incur liabilities associated with so doing on the basis it would not have to give security.
Waddell J drew an analogy with the doctrine of laches, and in such cases the length of the delay and the nature of the acts done during the interval were relevant considerations to the inquiry whether those factors had caused an imbalance of justice justifying denying the moving party a remedy to which it would otherwise be entitled.
Reference was also made to the recent decision of Wilson J in Cosmetic Laser Clinic Pty Ltd v Pirintji [2015] NSWSC 1353 ("Cosmetic Laser Clinic"), where, with great respect, her Honour very helpfully and succinctly summarised the relevant principles at [21] and subsequently. At [42] her Honour observed: "It has been frequently held that the further a plaintiff has proceeded with its litigation and the greater the costs it has incurred without steps having been taken to obtain security for costs, the more difficult will be a defendant's task in persuading the court that an order is required and appropriate."
With respect, I agree with her Honour's analysis.
However, one should be careful about regarding parties as having engaged in conduct "waiving" their procedural rights following the decisions of the High Court in Commonwealth v Verwayen [1990] HCA 39; 170 CLR 394 and Berowra Holdings Pty Ltd v Gordon [2006] HCA 32; 225 CLR 364. Rather, the consideration, as I think both counsel agree, is that, as I have already pointed out, individual factors such as delay are matters that need to be weighed and assessed in all the circumstances of the case. No doubt there will be cases, such as Cosmetic Laser Clinic seems to be, where a factor such as delay may be seen as being entitled to decisive weight. However, I am persuaded that this is not such a case.
I should say that Mr Peadon also laid emphasis upon the lack of any explicit explanation for the delay. In modern case management, an explanation for delay is generally considered to be an essential condition of a grant of procedural relief: see Aon Risk Services Australia v Australian National University [2009] HCA 27; 239 CLR 175. However, delay in litigation is always relative. In Cosmetic Laser Clinic, very substantial delay occurred before the defendant made its application. All of the preparation for trial had been undertaken and the matter was merely awaiting the allocation of a hearing date. The costs expended by the plaintiff were in the vicinity of $300,000 and the amount of security sought, of about $150,000, would have stultified, at that very late stage, the plaintiff's claim.
There is no suggestion in this case, or any argument advanced, of any stultification. It is implicit in the findings I have already made that the plaintiff has backers. Moreover, the claim has not reached the same late stage in its preparation as Cosmetic Laser Clinic. When the question of security was first raised, the plaintiff had just served its evidence and, with respect, had very greatly enlarged the ambit of the claim. Such a consideration, I infer, caused the defendant to take stock of where it stood in relation to the further conduct of the proceedings. An extension of the claim from $ 700,000, or thereabouts, to $ 7 million, or thereabouts, is obviously no small thing. If there was a change of lawyers and a review of the defendants' position, it is in those circumstances, in my judgment, entirely understandable.
I am satisfied that the delay in this case, if such it be, is not such as to disentitle the defendant from an order for security. There is no evidence to suggest that had an application for security been made at an earlier time, the plaintiff may have reconsidered its position in relation to the litigation. There is no suggestion that an earlier application for security would have caused any different step to be taken by the plaintiff in the prosecution of its claim.
There is some evidence in the case that the impecuniosity of the plaintiff is in part due to the alleged breaches of the defendant. As I have pointed out when dealing with the plaintiff's financial position, that in the 2012-2013 year the loss was $227,993. However, I am not persuaded that the plaintiff's impecuniosity is due to the defendant's allegedly wrongful conduct, given that it seems to be a longstanding circumstance and the mode of operating the plaintiff as a commercial vehicle, as I have said, seems to be that working capital is introduced by way of loans from persons interested in its activities.

Decision on security

I will deal with the question of the amount of security sought separately, but it is not argued in this case that there is any disproportion between the importance and complexity of the proceedings and the amount of the security sought. I am satisfied weighing the relevant factors relied upon by the parties with the whole of the circumstances of the case that the defendant has made out a case for an order for security for costs.

The amount of security

The application is supported by the affidavit of Raylee Joy Hartwell, a member of the firm Kennedys and the solicitor on record for the defendants. I am satisfied that Ms Hartwell is a very experienced litigation solicitor and is well placed to provide an opinion about the amount of costs likely to be incurred in defending the plaintiff's claim.
However, her evidence about those matters is not un-contradicted. The plaintiff has read the affidavit of Peta Lesley Solomon affirmed on 23 February 2016. Ms Solomon is a solicitor practising exclusively as a legal cost consultant and has done so for the last 24 years. Her assessment of the likely costs involved are not insignificant but are considerably less than those estimated by Ms Hartwell.
Ms Hartwell's estimate was made from the standpoint of November 2015. Ms Solomon's was made more recently in February 2016, when, perhaps,s she has had the opportunity to have greater focus upon the work likely to be actually involved.
With no disrespect, Ms Hartwell seems to have approached the question of costs from what appears to me to be an unduly pessimistic approach about what might actually be involved in defending this case. Moreover, she has adopted a reasonable enough rule of thumb in assessing what she estimates will be the necessary costs on a solicitor and client basis, and inviting the Court to take a proportion of those costs as likely to be recoverable on the ordinary. Ms Hartwell says that that proportion should be, in her experience, about 75 to 85 per cent.
Ms Solomon has adopted perhaps the approach of a costs assessor where she has sought to assess the costs involved on a strictly party-and-party basis or, I should say, I suppose, ordinary basis. She has also been asked to make assumptions about time required for the hearing, which is somewhat at variance with Ms Hartwell's assessment. However, Ms Solomon does accept that the type of work that Ms Hartwell has described as necessary to defend the case. Her main issue with Ms Hartwell's assessment relates to whether quite so much work will really need to be done at each important stage along the way. But certainly Ms Solomon is of the view that the stages identified by Ms Hartwell are appropriate.
In assessing the likely costs for the purpose of working out an appropriate amount for security, the Court is entitled to take a broad-brush approach, albeit informed by the expert evidence led in the case. It does seem to me that pessimistic as Ms Hartwell has been in respect of certain items, Ms Solomon has been somewhat optimistic, and that the likely amount of costs lies somewhere in between, not precisely in the middle. Ms Hartwell suggested a range, being 75% of 392,000 to 440,000. Ms Solomon assessed the costs at a little over is $170,000.
I should say that no claim is pressed for any past costs up until the question of security was first raised and I do not propose to allow security in respect of those costs.
Mr Peadon argued that there are other items I should exclude. In particular, he argued that had the defendant complied with timetables, all of its evidence would already have been served, probably by 30 October 2015.
As I said at the start, the case is of some complexity. Without any criticism of the plaintiff's lawyers, I do record that there were a number of extensions of the timetable to enable them to get their evidence on. As I have said, I am prepared to infer the need for these extensions was because of the complexity of the litigation. I will give the defendant the benefit of the same inference. It seems to me that although there is force in the argument that a party cannot be permitted to be simply reactive; that a defendant to litigation needs to be proactive, preparing its case at the same time as the plaintiff prepares its case; even so, it was probably unlikely that the defendant could comply with the timetable fixed in the District Court, given the great change in the ambit of the plaintiff's case, and the necessity for transfer of the proceedings to this Court. These factors would necessarily put the timetable back.
Without going into too much detail about the costs, but using the items on p 19 of Ms Solomon's affidavit as a reference point, I will set out the items I consider reasonable and my assessment of them. I do record that Mr Peadon suggested that a number of the items should not be permitted. However, I am of the view that as the question of security was raised in September and resisted from that time on, security should cover costs from that time. Let me say, however, that I am conscious of the fact that it is not the function of an order for security for costs to provide anything in the nature of a complete indemnity. Rather, what the law requires is some reasonable measure of security for the defendant, to guard against the prospect that the plaintiff will be unable to meet, and promptly meet, an adverse order for costs.

Assessment

Relying upon Ms Solomon's table at p 19, I think the basis of the calculation should be as follows: 1. Item 1, $2,670. 2. Item 2, $7,700. I have allowed more than Ms Solomon because it seemed to me that it is reasonable to allow more for preparation, particularly on counsel's part, than seems to be implied in her allowance. 3. Item 3, $1,030. 4. Item 5, zero. I agree with Mr Peadon's argument that the amount claimed in this regard is too nebulous to have any basis in reality and no allowance should be made. 5. Item 6, $30,000. I have allowed more than Ms Solomon suggested. It seemed to me that her estimate was a bare minimum. 6. Item 7, $5,855. 7. Item 8, $10,000. I accept that the amount claimed for attendance at directions hearings was far too generous. However, in a case like this, there is legitimate preparation to be done for attendance at directions hearings, where complex issues might arise and where the Court will naturally rely upon counsel to be fully across all the details of her or his brief. One cannot be in that position unless one puts time into reworking the matter and legitimately refreshing one's memory. 8. Item 9, $25,000. This is slightly more than Ms Solomon allowed. I have rounded the figure up. 9. Item 10, $11,511.25. 10. I record that up to item 10 the subtotal is $93,755. 11. Item 11, which is preparation for hearing, $30,000. It seems to me that perhaps a couple of extra days of preparation may be necessary in a case of this nature than was allowed by Ms Solomon. 12. Item 12, $48,000. I have worked on the basis that the trial is likely to go for 10 days. I think it appropriate to make an allowance for the whole of the trial because, if I may use the vernacular, the trial is the pointy end of the litigation when costs tend to crescendo. 13. Item 13, $50,000. 14. The subtotal is $128,000, that is, the subtotal of items 11, 12 and 13. The total is $221,755.
I think it appropriate in the case to make provision for security in two tranches. Both sides contemplate that there will be a mediation, and although the level of optimism varies, I think that in the first place security should be allowed up to the completion of the mediation. Rather than requiring the parties to come back, I think the best thing to do is to make some order that if the matter does not resolve within a reasonable time of mediation, say 14 days, then there should be a second provision of security in the sum of $128,000.
I direct counsel to bring in Short Minutes of Order providing for the provision of security in the sum of $93,755 within 14 days and for a second tranche of security, in the event that the matter does not settle within 14 days of the mediation, in the sum of $128,000. (Counsel addressed on costs.)
Mr Afshar seeks an order for costs of the motion. That is opposed by Mr Peadon. I am informed, without objection, that there were negotiations about security. An offer was made by the plaintiff in an amount significantly below the amount I have allowed. Nonetheless, Mr Peadon properly submits that that an offer was made demonstrates that his client was not taking a high-handed or unreasonable approach to the issue. I accept that argument, with respect, so far as it goes. He refers me to my decision in Hoffmann v Challis (No 2) [2016] NSWSC 269, where at [22] I referred to the statement of principle contained in Mr Dal Pont's Law of Costs: "That in respect of the costs of applications for security, the usual order should be that the costs of the successful defendant are his costs in the cause. The theory being that if the plaintiff wins, the successful interlocutory application will not have been relevant to the outcome of the trial."
I departed from that rule in Hoffmann. It seems to me that the question is not so much whether the success of an unsuccessful defendant is relevant to the outcome. Rather, the question is whether the application was reasonable and necessary at the time it was made. Applying that somewhat different test, the general rule established by the Uniform Civil Procedure Rules should apply. That is to say I am satisfied, for the reasons I have given, that the application for security was reasonable and necessary in the defence of the defendants' case and the security issue is a sufficiently discrete issue to justify an application of the general rule that costs follow the event. As the issue has been resolved in favour of the defendant, I am persuaded that the defendants should have their costs of the application in accordance with rules 41.2 and 42.7.
My order is the plaintiff is to pay the defendants' costs of and incidental to the motion.

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: 13 May 2016

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