29It will now be appropriate to consider the plaintiffs' claim for an order that the defendant provide security for costs, and consequential relief. That application remains live, given that I have declined to entertain the application to dismiss the defendant's cross claim.
30The plaintiff relies upon UCPR r 42.21(1)(d) and s 1335 of the Corporations Act 2001 (Cth). It has so often been held that the requirements of both provisions are essentially the same, that it is no longer necessary to cite authority to that effect.
31As I have noted above, Mr Heath advised the court through my associate before the hearing of the application that the defendant relied upon the arguments contained in his email dated 8 August 2014 to the plaintiffs' solicitor. The first argument put by the defendant, is that it is the defendant, and a party to litigation that is defending itself is not ordinarily ordered to give security. Further "a defendant which counterclaims is ordinarily protected from providing security for costs if the subject matter of the dispute is not new - Neck v Taylor (1893) 1 QB 50". Secondly, security for costs should be refused because the application has been made very late in the proceedings only a few months before the trial is due to take place in mid-November 2014. Finally, an order for the provision of security for costs should be refused where the defendant's lack of funds has been caused or contributed to by the plaintiff. Mr Heath merely asserted that the alleged wrongful conduct of the plaintiff as pleaded in the defence "'caused' our business the significant distress that will be the basis of our counterclaim".
32Mr Heath did not assert that the making of an order for security for costs would stifle the proceedings.
33Mr Heath's email does not deny that the defendant is suffering financial difficulties that may make it unable to pay the costs of the plaintiff if ordered to do so. Mr Heath positively asserts that the defendant is suffering "significant distress", as part of his claim that security for costs should be refused because the defendant's impecuniosity is attributable to the plaintiffs' conduct.
34The first question for consideration is whether "there is reason to believe that the plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so": UCPR r 42.21(1)(d).
35Of course, it is the plaintiff in this case that has made the application for security for costs against the defendant, in respect of the costs of defending the cross claim, and incidentally, the costs of meeting the same issues raised in the defendant's defence.
36It is clear that security for costs may be ordered against a defendant who is a cross claimant in the proceedings, as "plaintiff" is defined in s 3 of the Civil Procedure Act 2005 (NSW) as meaning "a person by whom proceedings are commenced... and includes a person by whom a cross-claim is made..."
37The question of when a cross claimant may be the subject of an order for security for costs has been considered in a number of cases that have usefully been collected and considered by Brereton J in Bevwizz Group Pty Ltd v Transport Solutions Pty Ltd [2008] NSWSC 1399 at [11] - [18]. At [18] his Honour concluded:
[18] The position therefore seems to me to be that, as a matter of jurisdiction, the reference in the section and the rule to "plaintiff" extends to encompass a cross-claimant. However, as a matter of discretion the court will not make an order against a cross-claimant where the cross-claim arises out of the same matters as the claim and is purely by way of defence. If it extends beyond being purely by way of defence, then the court will have regard to the overall nature of the proceeding and the cross-claim to see whether it can be said that in truth the cross-claimant has become, in substance, a plaintiff.
38I respectfully agree with Brereton J's reasoning and his conclusion. It is notable that his Honour distinguishes between cross claims that arise out of the "same matters" as the claim and are "purely by way of defence", and cross claims that extend "beyond being purely by way of defence". In the important case of Buckley v Bennell (1974) 1 ACLR 301 Street CJ at 307, in a passage extracted by Brereton J at [17] referred to a cross claim "which amounts simply to a defence to the action" (my emphasis).
39The question that arises is as to how the court should distinguish between cross claims that arise out of the same matters as the claim and are purely by way of defence, and those that extend beyond being purely by way of defence.
40The analysis of the pleadings in the present case that is necessary is relatively simple. In its amended statement of claim the plaintiff claims for unpaid rent and damages for breach of a lease. The defendant has admitted the elements of the plaintiffs' claim. The defence is one of confession and avoidance. The defendant says that the lease should be avoided by order of the court for contravention of the Australian Consumer Law. The lease was frustrated by the same events that falsified the representation alleged to have been made by the plaintiffs. The plaintiffs have failed to mitigate their loss. As I have noted, the defendant in its amended cross claim has repeated the pleading of its defence under the Australian Consumer Law, by using the pleading device "the cross claimant repeats paragraphs 13 to 33 of its defence". However, in addition to its claim for an order avoiding the lease, the defendant claims compensation calculated at $1,757,024.67, before interest.
41The question is: has the defendant, in going beyond its claim for an order that the lease be avoided, and claiming an order for substantial compensation, gone beyond making a cross claim that is purely by way of defence, so that the court must have regard to the overall nature of the proceeding, and the cross claim, to see whether it can be said that in truth the defendant has become, in substance, a plaintiff?
42The same question arose for consideration before Hislop J in Bank of Western Australia v Daleport [2010] NSWSC 1207. In that case the relevant defendant, in its amended cross claim, repeated and relied upon the allegations made in the amended defence, save in respect of the relief sought. As in the present case, in the cross claim the defendant sought substantial damages from the plaintiff in respect of the matter pleaded in defence. Hislop J at [12] also extracted and relied upon the conclusion reached by Brereton J in Bevwizz at [18]. His Honour concluded at [16]:
[16] In my opinion, the cross claim arises out of the same matters as the claim. However, it extends beyond being purely defensive and seeks to claim substantial damages far exceeding any alleged liability to the plaintiff. That claim will involve the plaintiff incurring costs which it would not have incurred had the cross claim been confined to matters relating to the defence of the plaintiff's claim. The first defendant has become, in substance, a plaintiff to the extent of the damages claimed by it and is, to that extent, susceptible to an order for security for costs. Any such order, however, would not include security for any part of the costs incurred in the defence of the proceedings.
43I respectfully agree with the reasoning adopted by Hislop J, and have decided that the same result should be reached in the present case. The plaintiffs' case is effectively admitted, and in any event would require relatively little evidence to prove. The defendant's position is one of confession and avoidance. The defendant has made a very substantial claim for damages based upon the same allegations in its cross claim as were made in the defence. Strictly, as is reflected in par 34 of the amended defence, the matters pleaded concerning the Australian Consumer Law claim do not provide a defence in themselves, but will only do so if the defendant succeeds on its cross claim in obtaining the order avoiding the lease that it seeks in prayer 1. Substantially the whole of the evidence in the proceedings relates to the cross claim. While there is no proof, it is a reasonable inference that the size of the damages claim has motivated the plaintiff to marshal the extensive and comprehensive evidence that has been filed in response to the cross claim. The defendant has become, in substance, a plaintiff to the extent of the damages claimed by it in the cross claim.
44It is therefore necessary to return to the question whether the evidence gives rise to a reason to believe that the defendant will be unable to pay the costs of the plaintiffs if ordered to do so, limited to the costs of the cross claim, and incidentally the same issues that are raised in the defence.
45Although there is no evidence concerning the overall financial position of the defendant, for example in the form of relatively current financial accounts, the evidence satisfies me that there is "reason to believe" that the defendant will be unable to pay any relevant costs order in favour of the plaintiffs. As I have noted above, following a period in which the steps taken by the defendant in the proceedings were undertaken in the usual way on its behalf by a legal representative, that legal representative filed a notice of ceasing to act on 22 May 2014. On 30 May 2014 Mr Heath sought leave to appear for the defendant at a directions hearing on behalf of the defendant. The record of proceedings contains a note by the Acting Registrar in the following terms:
[Defendant] is unsure if they are going to contest matter (due to lack of funding). If contested - 3 day hearing. If uncontested - [defendant] must advise position on next occasion.
46The defendant has not provided any specific confirmation to the court, or to the plaintiff, as to whether it has funds to contest the hearing.
47The parties prepared for and participated in a mediation that the court ordered to be held on 8 July 2014. The mediation was unsuccessful.
48On 24 July 2014 the plaintiffs' solicitor wrote a letter to Mr Heath in which they demanded that the defendant provide security for the plaintiffs' costs incurred in responding to the amended defence (in so far as it relied upon the cross claim) and the amended cross claim. The solicitor stated that those costs to the date of the letter were $98,858.10, and estimated the additional costs, assuming a three-day hearing, would be $50,000, giving a total of $148,858.10. On the stated assumption that the plaintiffs could reasonably expect to recover approximately 65% of the actual costs, the plaintiffs demanded security of $96,757.77.
49The only response given by the defendant to the solicitor's letter is Mr Heath's email dated 8 August 2014. As I have noted, Mr Heath did not deny that the defendant was impecunious; but instead he asserted that the plaintiffs were responsible for the defendant's financial difficulties.
50It is also of some significance that the defendant did not retain legal representation to defend the plaintiffs' notice of motion. If the defendant believes that its cross claim, which is likely to be for an amount in the order of $2,000,000 after interest is added, is a good claim, then the defendant's failure to secure representation to defend the plaintiffs' application for summary dismissal is some indication of financial difficulty.
51These matters are in my opinion sufficient to give the court reason to believe that the defendant will be unable to pay the costs of the plaintiffs of the issues raised by the cross claim, if it is ordered to do so.
52I should record that, by email received by my associate on 30 September 2014, the day after the plaintiffs' application was heard, Mr McKeand forwarded an email that he had received from Mr Heath that advises that the defendant has been placed into administration. Mr Heath's email has not formally been proved, but it appears to have been sent from the same email address as Mr Heath has sent other emails that are in evidence.
53I formed my conclusion that there was reason to believe that the defendant would not be able to pay the relevant costs of the plaintiffs before I received notice of Mr Heath's email, but it is obvious for practical reasons that the email adds force to the conclusion that I reached.
54The second step in the process of determining whether the court should make an order that the defendant provide security for the plaintiffs' costs is whether the court should exercise its discretion in favour of the making of such an order.
55I have noted above that Mr Heath did not suggest that the making of an order for security for costs would stifle the defendant proceeding on its cross claim. Assuming the recent disclosure in Mr Heath's email is true, the defendant may well not be able to prosecute the cross claim for reasons of insolvency that have arisen quite apart from the consequences of any order for security for costs.
56I do not accept the defendant's argument that the plaintiffs' claim should be dismissed because it has been made too late: UCPR r 42.21(1A)(l). There is no evidence that the plaintiffs had any inkling that the defendant may be in financial difficulties in relation to its capacity to meet any costs order, until Mr Heath made the announcement to the court on 30 May 2014 that I have referred to above. The parties then co-operated in participating in a mediation, and the plaintiffs made their demand for security for costs on 24 July 2014, only a couple of weeks after the mediation failed. The conduct of the plaintiffs has not been dilatory.
57On the balance of the evidence the defendant has not established that its present financial difficulties were caused by the conduct of the plaintiffs alleged by the defendant in its defence in respect of its Australian Consumer Law claim. The balance of the evidence on that issue at this stage of the proceedings is heavily in favour of the plaintiffs. The defendant's argument is "somewhat circular" as McDougall J observed in relation to an equivalent argument in Nonox Australia v Certain Underwriters at Lloyds Subscribing to Contract No CV0263CGL [2014] NSWSC 221 at [24]. The defendant has not tendered any evidence that directly links its present predicament to any alleged conduct by the plaintiffs in 2011.
58The defendant has not put any further reason forward as to why the court should not, in the exercise of its discretion, make an order for security for costs.
59The third and final issue to be addressed is the amount of the security that the court should order the defendant to provide. It is well accepted that an order for security for costs is not intended to provide the party in favour of whom the order is made with a complete security or indemnity.
60I have recorded the amount claimed by the plaintiffs, and the basis of that claim, above. The plaintiffs tendered evidence of an expert costs consultant in support of their claim. Somewhat strangely, that evidence only considered the reasonableness of the entirety of the plaintiffs' costs to date, with no discrimination between the plaintiffs' costs of their own proceedings, and their costs of dealing with the issues raised by the defendant in both its defence and the cross claim. The evidence also said nothing about the reasonableness of the plaintiffs' solicitor's estimate that future costs of $50,000 would be incurred.
61Notwithstanding this deficiency in the expert evidence, I have accepted Mr McKeand's submission that the likelihood is that almost all of the costs will relate to the issues raised by the cross claim. Also, the estimate of $50,000 for the costs of preparing for and conducting a three-day hearing in the Supreme Court is, as a matter of experience, reasonably modest. As Mr McKeand submitted, the estimation of legal costs in any event is imprecise. The court can deal with any marginal deficiencies in the evidence by increasing the discount it might otherwise have applied to the estimate of likely actual costs, in fixing the amount of security to be provided.
62In all of the circumstances I propose to order that the defendant provide security to the plaintiff for its costs of defending the cross claim, and dealing with the same issues in the amended defence, in the sum of $75,000. As the hearing is imminent, it will be appropriate to order the defendant to provide that security in one amount before the commencement of the hearing.
63I will make the following orders:
(1)Order that the defendant, on or before 24 October 2014, provide security for the plaintiffs' costs of defending the defendant's cross claim in these proceedings in the sum of $75,000.
(2)Order that such security be given by payment into court or in such other manner as the court shall approve.
(3)Order that until such security is provided, the defendant's cross claim is stayed.
(4)Direct that, if the defendant fails to provide such security, the plaintiffs may make an application under UCPR r 42.21(3) for dismissal of the defendant's cross claim by notice of motion that is served upon the defendant in accordance with the rules on or before 7 November 2014 returnable at 10 AM on 17 November 2014 before Nicholas AJ.
(5)Stand the plaintiffs' notice of motion filed on 13 August 2014, in so far as it contains claims for relief other than an application for security for costs, over to 10 AM on 17 November before Nicholas AJ.
(6)Order that the plaintiffs' costs of the notice of motion filed on 13 August 2014, in so far as it claims an order for security for costs, be the plaintiffs' costs in the cause.
(7)Reserve the costs of the balance of the claims for relief in the plaintiffs' notice of motion filed on 13 August 2014.
(8)Order that exhibits may be returned in accordance with the rules.