Quantum of the security sought
128 As is not unusual in applications of the present nature, the parties adduced evidence from their respective solicitors as to the likely quantum of costs which will be incurred by the Commissioner in the action. Even though the Court was asked by each party not to accept the other's estimation, neither solicitor was cross-examined on their respective assessments.
129 This case is yet another example of the unheralded statistical anomaly that, universally in applications for security for costs, the solicitor for the party seeking an order for security will impartially estimate their client's costs of the action to be substantially higher than those impartially estimated by the solicitor for the party seeking to avoid the order. It is, with respect, somewhat bizarre for courts to continue to participate in the delusion that evidence of that nature has substantial credibility. With great respect, it is beyond credulity for courts to continue to receive and act upon so-called expert evidence which is so lacking in objectivity. Further, in cases such as this, the Court is asked to proceed upon the deponents' opinion evidence which does not comply with the requirements for expert evidence provided for in rr 23.12 - 23.13 of the Rules, and in circumstances where the witness has duties owed to their client which make them particularly inapt as an independent witness.
130 Nevertheless, the parties were content for the Court to proceed based on the evidence as it was given and so it must.
131 The approach to assessing quantum for the purposes of security for costs was identified by Gordon J in Norcast S.ár.L v Bradken Limited [2012] FCA 765 [16] (Norcast) where her Honour referred to three issues which regularly arise for the court's consideration. They were:
1. whether it is appropriate to commence the quantification of costs payable as security with an estimate of actual or indemnity costs, discounted by some factor, or whether a calculation of party-party costs is the appropriate starting point;
2. if actual or indemnity costs are permissible, what is the appropriate discount to be applied, and, as a related issue, what the is the function of the "two-thirds rule"; and
3. what steps in the proceeding are included in the security to be provided.
132 That is an appropriate framework within which to work in the present case.
133 For the Commissioner, the evidence of quantum was found in the affidavit of a Ms Emma Whan. It is undoubted that Ms Whan is a highly experienced solicitor in taxation matters and, in particular, in relation to proceedings under Part IVC of the TAA53 on behalf of the Commissioner. Of particular note is that, since 2011, she has participated in many proceedings relating to Mr Gould, his clients, and companies under his control, a number of which have reached a final hearing. There is little doubt that Ms Whan would be familiar with the interlocutory steps usually required in proceedings of the current type, the steps required to bring such proceedings to a hearing, and the cost of the same.
134 In Ms Whan's affidavit she undertook an estimate of the likely costs which would be incurred by the Commissioner which she identified as being $702,313.24. In relation to that amount, she made deductions to identify what would be the likely costs recovered on a party-party basis, indicating that she believed that the Commissioner would be likely to recover 80−90% of professional fees and 90−100% of disbursements. Applying the lower of those percentages, she calculated the amount which Mr Gumm might be required to pay on a party-party basis if he is not successful as $608,692.52. To give some context to that figure, the Commissioner has already incurred costs of around $260,000 in the action to date.
135 Ms Whan's estimation was based upon the hearing of the matter requiring seven days. Whilst that might usually be sufficient to cater for actions such as the present, it is apparent from what has occurred in the interlocutory stages that the parties' respective approaches will not be likely to confine the issues to those which are truly relevant to the resolution of appeal. Rather, their conduct in the litigation to date suggests the opposite and, on present indications, it is not unreasonable to perceive that the hearing will take some additional time.
136 Mr Benjamin Jones, the principal solicitor of HPJ Lawyers & Tax Specialists, gave evidence for Mr Gumm in relation to the likely amount of the Commissioner's costs of the proceedings including a seven day trial, and he suggested that they would be substantially less than Ms Whan's estimate, although he did not venture a figure.
137 The Commissioner submitted that there was insufficient evidence that Mr Jones was familiar with the issues relating to the costs of proceedings or estimating costs to provide any useful evidence. That submission can be accepted to the extent that it relates to the question of the assessment of costs. His evidence of his relatively short career of practising law does not demonstrate any substantial experience with the assessment of costs. Whilst he referred to his experience in tax litigation generally, he made no mention of any experience in providing costs estimates or being involved in the assessment or taxation of costs.
138 Nevertheless, Mr Jones did not purport to make any assessment of the Commissioner's costs. He did not seek to apply any held expertise to known facts to reach an opinion as to what costs would be incurred by the Commissioner and, consequently, the attack on his lack of experience was, perhaps, misplaced. Rather, he drew attention to several points which, prima facie, might be taken as diminishing the veracity of Ms Whan's estimates.
139 In his affidavit, Mr Jones first directed attention to the fact that he was aware of other proceedings in which Dr Jaques and Ms Ensor, the Commissioner's present counsel, had acted for the Commissioner, and that the estimate of $608,692.52 for the current proceedings was inconsistent with the costs incurred in those actions. He referred to proceedings in which judgment was given, namely, Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2022] FCA 971 (Anglo American), which he said went for, in effect, 18 hearing days and in which the Commissioner engaged three counsel, and the Commissioner's costs were $833,218.54. In his opinion, Ms Whan's estimation of the costs for the present matter were inconsistent with those which were incurred in that case. He also referred to the matter of Melbourne Corporation v Commissioner of Taxation [2022] FCA 972 (Melbourne Corporation), which was heard at the same time as another matter referred to as the "Photo Advertising" matter. He said that the Commissioner's costs of these two matters, heard over 10 days, were $503,031, though he claimed that it might be said that there were actually 14 sitting days. Again, he asserted that these costs were inconsistent with Ms Whan's estimate for the present proceeding.
140 This evidence was countered by the affidavit of a Mr Joel Shaw sworn 1 September 2023, which addressed each of the Anglo American, Melbourne Corporation and Photo Advertising matters. Mr Shaw explained that those three matters were tangentially related, and that it was ordered that the evidence in the Anglo American matter was to be evidence in the Melbourne Corporation and Photo Advertising matters as well. He also identified that the Melbourne Corporation and Photo Advertising matters were set down to be heard over 14 days in April 2020, but were then delayed to September and October of that year. It appears that the Anglo American matter took up more time than was expected, and the other matters were therefore adjourned to a later date.
141 By reference to Mr Shaw's evidence, counsel for the Commissioner demonstrated that the costs which were incurred in the Anglo American matter and the combined Melbourne Corporation and Photo Advertising matters are useful comparators for assessing the costs which might be incurred in the present matter. Ms Whan anticipates that the cost of the hearing days for the Commissioner will be approximately one quarter of those incurred in the Anglo American matter and less than half those incurred in the Melbourne Corporation and Photo Advertising matters, though that is optimistic. That said, the anticipated cost of preparation work for hearing as between the Anglo American matter and the current matter are comparable and, in this respect it is relevant that it was anticipated that the hearing of the former matter would be five days despite the subsequent expansion of the length of the trial. It is true that the anticipated cost of pre-trial work for the Melbourne Corporation and Photo Advertising matters was substantially less than the amount anticipated for the present matter, but that was due to the evidence in the Anglo American matter being used in the Melbourne Corporation and Photo Advertising matters.
142 The result of this is that there is nothing in the matters identified by Mr Jones concerning the previous similar matters which undermines Ms Whan's estimate as to the likely costs of the Commissioner defending the proceedings.
143 Mr Jones emphasised that the counsel's fees for the Commissioner were modest (being just over $4,000 per day) and that the combined daily cost for Dr Jaques, Ms Ensor and Ms Whan would be around $7,500. This should be accepted to a degree. It is notorious that the fees payable to counsel by the Commonwealth Government are generally at the low end of the range of potential fees. Indeed, on occasion, it might be said that they are below that. For that reason, it must be accepted that the quantum of costs for which security is to be provided should be reduced to below that which would otherwise be the case if counsel were able to charge commercial, or near commercial, rates for their services. Nevertheless, this has already been brought to account by Ms Whan and so it does not disturb her calculation.
144 Regardless of the low rates for which solicitors and barristers for the Commonwealth are required to work, there can be no doubt that this matter is one of some complexity and will require substantial preparation. Some evidence of this can be found in the affidavit of Mr Jones affirmed 8 September 2023, in which he identified that the amount paid by Mr Gumm and DSPL UK for work done in the period from November 2022 to 31 July 2023 in respect of the current proceedings was $795,179, excluding GST. As was submitted for the Commissioner, this current litigation has not reached the stage where Mr Gumm has filed his evidence, although it can be accepted that the work undertaken by Mr Gumm's legal team will have involved some effort in that regard. On the other hand, the evidence of Mr Jones indicates that Mr Gumm has been spending an average of almost $90,000 per month on this litigation in circumstances where it is only in its embryonic stages. For comparison purposes, that gives some context to the relatively small sum of $608,000 assessed as the Commissioner's costs for the whole matter.
145 It must be acknowledged that Mr Gumm carries the onus in these proceedings, and for that reason, the bulk of the affidavit evidence will be provided by him which will necessarily increase the expense of the action for him. By contrast, the focus of the Commissioner's case will be to attempt to undermine Mr Gumm's evidence.
146 However, the fees already expended by Mr Gumm reveal the matter to be complex and the Commissioner's legal team will be required to consider and analyse a substantial body of material relating to Mr Gumm's complicated tax affairs. In addition, they will be required to do so without instructions from Mr Gumm or those who have advised him over the years. This would be difficult for one income year and, in this case, there are eight to consider. For these reasons, I do not consider that the amount of time and work involved in the action for the Commissioner's lawyers will necessarily be less than Mr Gumm's lawyers.
147 On this point, it should be concluded that, in light of the complexity of the matter and the number of income years involved, Ms Whan's estimate of costs is modest or conservative.
148 As counsel for Mr Gumm pointed out, at the rates charged by counsel for the Commissioner, the amount allocated by Ms Whan would accommodate a substantial period of preparation by them. Nevertheless, the quantum paid to the same counsel in other matters appears to justify Ms Whan's assessment. It is also often the case in Part IVC matters that the bulk of the work on the Commissioner's side leading up to trial will be undertaken by counsel, who are required to prepare what is usually substantial cross-examination and the presentation of the case to the Court. Based upon the small exposure to the facts of the case which occurred on the present application, it should be anticipated that the Commissioner's counsel will be required to undertake substantial work in preparation.
149 Finally, Mr Jones claimed that there were several cases of the present type which settled before trial, and the possibility of that happening in this case should be considered when quantifying the amount of security. Again, that is a valid justification for a reduction in the quantum of security to be ordered, though in this case the current behaviour of the parties provides no real justification for any such reduction. At present, the proceedings are of a kind where each side appears to be determined to take every point against the other regardless of merit, and experience shows that cases with this characteristic are more unlikely to settle than not. Settlement discussions have already occurred between the parties and without prejudice letters have passed between them, albeit to no result. That possibly suggests that, as settlement attempts have failed thus far, settlement in the future may be less likely.
150 If one were to put aside for one moment the instant proceedings and the meagre rates which the Commissioner is prepared to pay to those who act for him, it is worthy of remark that a seven day trial in this Court would cost as little as $600,000. In ordinary commercial litigation the cost could well be double that amount. Whilst this has only tangential relevance to the question before the Court, which is concerned with the actual costs expected to be incurred by the Commissioner, it is not inappropriate to recognise that in the scheme of the costs usually incurred in this Court, $600,000 for a seven day hearing is at the very low end of the range.
151 The second issue recognised in Gordon J's decision in Norcast was that of discounting the actual anticipated costs to reflect party-party costs, so as to reflect the amount which is likely to be awarded if the plaintiff fails. In this case, Ms Whan made downward adjustments to reflect that which the Commissioner might receive on a taxation of his costs on that scale. The percentage reductions are small, but that is far from surprising given the low rates which the Australian Government Solicitor and counsel retained by the Commonwealth are paid. This reflects the observations of Gordon J in Norcast at [23] that, "… the more expensive the lawyers, the larger the discount". In the result, and in the absence of any countervailing evidence, the discounts applied by Ms Whan are appropriate.
152 In Norcast, Gordon J also considered the further potential discounting arising from what is colloquially referred to as the "two thirds rule", being the notion that security for costs is awarded at around two thirds of the identified party-party costs. After reviewing the authorities considering the application of this rule in Australia, including Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 19) (1995) 134 ALR 187 and Quad Consulting Pty Ltd v David R Bleakley and Associates Pty Ltd (Federal Court of Australia, Burchett J, 28 June 1991), her Honour (at [28]) summarised the position in the following terms which I gratefully adopt:
In summary, the "two-thirds rule" may be applied where there are factors present which suggest that the quantum of the security ought to be further discounted. Those factors include the chances of settlement, the merits of the case, whether an order of security would effectively deny the applicant from pursuing the claim, the strength of the evidence regarding the quantification of the security, the possibility that substantial amounts may be taxed off the bill and the prospect or actuality of off-setting costs orders: Quad Consulting at [10]; Farmitalia at 345. Subsequent cases have indicated that the discount to be applied is not fixed at two-thirds, but may vary as circumstances dictate: see, eg, Pathway Investments at [55].
153 Here, there ought to be some discounting to account for the fact that, in relation to the penalties imposed by the Commissioner and the high interest charged on the Commissioner's assessment, Mr Gumm's action has some defensive elements to it. Further, as this matter is likely to involve not insignificant interlocutory skirmishing, it is possible that Mr Gumm may obtain some off-setting costs orders. Despite what is said above, it is also possible that the matter may settle, though that should only account for a small discount.
154 The third matter referred to by Gordon J in Norcast related to the steps in the proceeding which the order for security should cover. Here, Ms Whan estimated the costs to the end of the trial and no substantive argument was directly advanced to the effect that the security should cover a lesser period. However, it cannot be ignored that the application for security for costs was brought some eight months after the proceedings were commenced, though it was flagged by the Commissioner a little earlier. As stated above, applications for security should be brought at an early stage and a failure to do so is relevant, if it has been decided that security should be ordered, to the steps which it ought to cover.
155 As mentioned above, Ms Whan identified in her affidavit that the Commissioner has already expended some $260,000 in the proceedings to date. By the Commissioner's application, he now seeks to obtain security for those costs as well as those which he will incur in respect of the remainder of the action. Conversely, Mr Gumm has expended some $800,000 in the defence of the proceedings, whilst unsure whether the Commissioner intended to seek the provision of security. Nevertheless, this is not a case where the hearing of Mr Gumm's action is imminent and all that has occurred is that the respective appeal statements have been filed.
156 For the reasons given earlier, any delay by the Commissioner in making the application has not been productive of any, or any substantial, detriment, though it has resulted in the Commissioner now asking for security for costs which he has already incurred. That necessitates a discount to the amount of security which would not have been ordered had the application been brought at an earlier time.
157 Mr Gumm also relied upon the amount of money which he spent on the audit, which he claimed was in the vicinity of $1,000,000, as militating against the making of an order for security, or the quantum to be ordered. However, the time and costs spent conducting the audit are not relevant to whether an order for security should be made in relation to the court process, or on what terms. Those are matters which predate the commencement of the proceedings such that they do not impact those matters between the parties in their capacity as litigants in the action.
158 In Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497, 515, French J recognised that if security is to be ordered it must be "sufficient" but beyond that there is no limit to the amount which can be ordered. This was relied upon by the Commissioner in support of the awarding of a substantial sum as security. However, French J was there referring to the word "sufficient" as it was used in s 533(1) of the Companies (Western Australia) Code, which has no correlation to the powers to be exercised by the Court in the current matter. Here, the quantum of the costs is in the Court's discretion which is exercised after a consideration of all relevant matters, including those which might give cause to reduce the amount.
159 That said, the amount of security should provide a measure of protection for the party who will otherwise be hindered in recovering their costs if an order is made in their favour. As indicated by Basten JA in Royal Guardian Management Pty Ltd v Nguyen [2015] NSWCA 148 [25]:
An order for security is not intended to be a full indemnity for costs recoverable from the unsuccessful party. Given that the real costs cannot be known in advance, the Court should adopt a realistic but conservative approach to the assessment of the evidence before it. …
160 That view is well entrenched and is a useful guide to the exercise of the discretion.
161 It is also within the scope of the exercise of the discretion to regard those factors which may have weighed against granting security at all, as being matters which reduce the amount of security awarded: see Acohs Pty Ltd v Merck Ltd [1997] FCA 573, citing Deltrend Pty Ltd v AST Australia Pty Ltd (1995) 16 ACSR 762, 764; A1 for Maintenance Pty Ltd v Lehal Pty Ltd [2018] FCA 1476 [50].