Hill v Zhang

Federal Court of Australia|2020-07-09|Before: Griffiths J

The sum of $48,598.46 plus interest from 9 April 2020 be released to the respondents from the $50,000.00 security lodged by the applicants on or about 5 November 2019.
The applicants are jointly and severally liable to give additional security for the respondents' costs in the amount of $100,000.00.
The security referred to in order 2 above is to be given in the form of a bank guarantee (or in such other form as is acceptable to the Registrar) and is to be lodged with the Registrar and a copy of which is to be served promptly on the solicitor for the respondents.
The bank guarantee (or other approved form) required by orders 2 and 3 above be lodged with the Registrar within 28 days hereof.
The proceedings are stayed until security for costs has been provided as required by orders 2, 3 and 4 above.
If the security is not paid in accordance with orders 2, 3 and 4 above, the proceedings be dismissed.
The applicants are jointly and severally liable to pay the respondents' costs of the interlocutory application filed on 12 May 2020, as agreed or taxed.
Liberty to apply on the giving of 72 hours' notice. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 This application for security for costs is a further interlocutory step in what have become protracted proceedings between the parties. The substantive dispute between the parties concerns the purchase of a law practice. The dispute is broadly described in Hill v Zhang [2019] FCA 1562 at [2]. 2 Security for costs was previously ordered, as reported in Hill v Zhang [2019] FCA 1562. In Hill v Zhang (No 2) [2019] FCA 1649, the Court ordered the applicants to pay costs on an indemnity basis in relation to the striking out of the applicants' originating application and statement of claim. 3 On 9 April 2020, with the leave of the Court, the applicants filed a fourth amended originating application and a fourth amended statement of claim. 4 The respondents' present application for further security for costs, which is brought by an interlocutory application filed on 12 May 2020, seeks orders which may be summarised as follows: (a) the sum of $48,598.46 be released to the respondents from the $50,000.00 security lodged by the applicants on or about 5 November 2019; (b) the applicants be jointly and severally liable to give security for the respondents' costs in the amount of $100,000.00 (exclusive of GST) within 28 days; (c) in the alternative to (b), the applicants jointly and severally are liable to give security for the respondents' costs in the amount of $48,598.46 (excluding GST) within 28 days; (d) the proceedings be stayed until the security for costs has been provided; (e) if the applicants fail to give the security for costs the proceedings be dismissed; and (f) the applicants pay the respondents' costs of the interlocutory application.

The parties' evidence 5 In support of their application for security for costs, the respondents relied upon an affidavit affirmed on 12 May 2020 by their instructing solicitor, Ms Erin Taylor. It summarised the background and history of the litigation. On the issue of security for costs, Ms Taylor deposed (and I accept with one exception): the second applicant has $2.00 of paid up share capital; the second applicant is the service trust of a law practice that no longer operates; the applicants are jointly and severally liable to pay the respondents' costs which have been taxed in the amount of $48,598.46 (Taxed Costs); the applicants are jointly and severally liable to pay the respondents' costs in the amount of approximately $95,500.00 in related proceedings in ACD14/2019; the applicants are also jointly and severally liable to pay the respondents' costs in accordance with orders made by the Court on 27 March 2020 in relation to amendments to the statement of claim and originating application; the first applicant is currently the subject of an adverse costs order made by the ACT Court of Appeal in Hill v The Council of the Law Society of the ACT (No 2) [2020] ACTCA 13; the first applicant owns three properties all of which are subject to caveats (but see [9(d)] below); the first applicant has lost his unrestricted practising certificate; and the applicants have rejected the respondents' request that they pay the Taxed Costs and provide further security in the sum of $100,000.00. 6 Ms Taylor deposed, and I accept, that the costs order dated 27 March 2020 is likely to be taxed in the amount of approximately $40,000.00, which would bring the total amount of costs owing by the applicants to the respondents to approximately $180,000.00 (including costs in the related proceeding in ACD14/2019). Ms Taylor deposed, and I accept, that the respondents' likely professional costs in the further conduct of the present proceeding will be in the range of approximately $40,000.00 to $66,000.00 and likely disbursements in the range of approximately $4,000.00 to $7,000.00. I also accept that the respondents' counsel's estimate that his future fees in respect of a hearing which is estimated to take four days will be between $16,500.00 and $22,500.00. 7 Ms Taylor opined, and I accept, that the sum of $95,000.00 plus GST is an accurate estimate of the respondents' total costs of the proceedings if the matter were to proceed to a hearing for four days. Ms Taylor is an experienced litigation solicitor. 8 The applicants relied upon an affidavit affirmed 12 June 2020 by their instructing solicitor, Mr Kurt Errol Richardson. Mr Richardson gave detailed evidence regarding the exchange of correspondence between the parties relating to the amendments which were included in the fourth originating application and fourth statement of claim, including correspondence which indicated that the parties' consented to proposed orders relating to the making of those amendments which were attached to Ms Taylor's email dated 26 March 2020. 9 On 6 July 2020, the applicants filed an affidavit sworn 3 July 2020 by Mr Hill. It offered no explanation for the non-compliance with the Court's orders dated 20 May 2020. Mr Hill's affidavit responded to that of Ms Taylor. He deposed that: (a) he works as Special Counsel to Nelson and Hill Lawyers and earned approximately $11,000.00 per month. He annexed a schedule of his assets and liabilities and stated that he was meeting his financial obligations but added that this had been difficult at times as he was relying on the moneys owing to him from the sale of his legal practice. The schedule attached to Mr Hill's affidavit showed that he had total estimated assets of $524,000.00 and estimated liabilities of approximately $450,000.00, including amounts of $180,000.00 and $60,000.00 respectively concerning his unsuccessful proceedings against the ACT Law Society in the ACT Supreme Court and on appeal. Although this material suggests that Mr Hill has limited financial means, it does not demonstrate that he is impecunious; (b) with reference to Ms Taylor's evidence that the second applicant had $2.00 of paid up share capital, Mr Hill said that this was normal; (c) with reference to [32(f)] of Ms Taylor's affidavit, Mr Hill said that he had come to an agreement with the ACT Law Society to pay its costs, which involves monthly payments in the amount of $5,000.00 commencing on 1 November 2020; and (d) with reference to Ms Taylor's evidence concerning his ownership of three properties, Mr Hill said that they all constitute one rural landholding and cannot be sold separately. He also said that in January 2020 the property had been transferred to his son, Mr Richard Hill, as part of what was described as "an intergenerational (farmland) transfer". 10 In his second affidavit which was filed on 9 July 2020, Mr Hill corrected that date and instead said that the transfer occurred on 18 October 2019. 11 In reply to Mr Hill's first belated affidavit, Ms Taylor filed an affidavit in reply dated 8 July 2020. The annexures to her affidavit demonstrate that the transfer from Mr Hill to his son occurred without monetary consideration. 12 Ms Taylor filed a further affidavit dated 8 July 2020, which described the outcome of the conference which was held earlier that day concerning the applicants' notice of objection to the Registrar's estimate of costs in ACD14/2019 (see [28] below). Ms Taylor deposed that, and I accept, that the applicants' withdrew their objection to that estimate and agreed to pay the respondents' costs in that other proceeding.

The parties' submissions summarised 13 As noted, the applicants were ordered to file a written outline of their submissions by 18 June 2020. This did not occur. Rather, a written outline dated 6 July 2020 was filed on 6 July 2020. In brief, those submissions are as follows. First, because there was said to be "clear merit" in all the applicants' claims against the respondents, it is not appropriate for the applicants to be "closed out of their rights". 14 Secondly, the Court should not proceed on the basis at this stage that the claims lack any merit or are hopeless. Rather, it was submitted that the claims were "very likely to succeed". 15 Thirdly, poverty of a party is not a sufficient basis to justify an order for security, citing Cowell v Taylor (1885) 31 ChD 34 and Coyle v Cassimatis [1994] 2 QdR 262. It was submitted that the applicants should be allowed to bring their proceedings irrespective of their financial circumstances and that there was no proper basis demonstrated in this case for additional security to be ordered, citing Co-Operative Farmers' & Graziers' & Direct Meat Supply Ltd v Smart [1977] VR 386. 16 Fourthly, neither of the applicants is a merely "nominal plaintiff" suing for the benefit of another person. 17 Fifthly, the applicants submitted that it was significant that the respondents had not filed a defence. 18 Sixthly, while acknowledging that the Court's power to order security for costs is discretionary, the applicants submitted that the power should not be used to require security for costs oppressively and the applicants reiterated that they had "good prospects for success". 19 Seventhly, the applicants submitted that they had duly complied with the Court's existing orders for security for costs and that the present application is oppressive because it is designed to shut out both the applicants from access to justice. 20 Eighthly, the applicants submitted that, in substance, they had brought the substantive proceedings so as to protect a right and that they should not be regarded as "mere plaintiffs" because they were defending their interests. 21 Ninthly, the applicants submitted that the existing order for security for costs is adequate and that it had been complied with. 22 Finally, the applicants submitted that the interests of justice would not be served by a further order for security because it would "effectively… foreclose and dismiss valid claims for relief". 23 In brief, the respondents, whose submissions were also filed late, made the following contentions. Following various earlier proceedings, on 5 November 2019 the respondents gave security in the sum of $50,000.00. On 15 January 2020, the respondents served on the applicants a bill of costs in relation to the orders made by the Court on 8 October 2019, which required the applicants to pay the costs of the respondents' earlier interlocutory application filed on 13 August 2019. The applicants did not pay the requested costs. After discussions, the applicants offered on 21 February 2020 to pay those costs by way of a payment of $45,000.00 spread over a period of 12 months. On 13 March 2020, the Registrar estimated the respondents' relevant costs to be $48,598.46. 24 On 17 March 2020, reasons for judgment were published by the ACT Court of Appeal in Hill v The Council of the Law Society of the ACT (No 2) [2020] ACTCA 3 in which the first applicant in these proceedings was ordered to pay the Law Society's costs of the proceeding and the appeal. 25 On 27 March 2020, this Court made orders granting the applicants leave to amend the originating application and statement of claim for a fourth time. The orders required the applicants to pay the respondents' costs of and incidental to the applicants' interlocutory application seeking leave to further amend the originating application and statement of claim and the costs thrown away by the amendments. The Court ordered that the respondents' costs be agreed or taxed and be payable immediately. 26 In order to avoid the costs of a taxation, the respondents invited the applicants on 7 April 2020 to pay the costs in the amount of the Registrar's estimate. The respondents also encouraged the applicants to discuss with them the escalating costs of the proceeding and to provide further security to the respondents in a sum of $100,000.00. 27 On 9 April 2020, the Registrar issued a certificate of taxation in the amount of the Taxed Costs. These Taxed Costs remain unpaid and interest accrues from 9 April 2020. 28 On 24 April 2020, the Registrar provided an estimate of the costs payable in respect of related proceedings involving the parties in ACD14/2019 in the amount of $93,786.22. As noted above, on 8 July 2020, the applicants withdrew their objection to that estimate and agreed to pay the respondents' costs in that amount. 29 Accordingly, as matters stand at present, the applicants have not: (a) paid the Taxed Costs; (b) responded to the respondents' letter requesting further security in the amount of $100,000.00; or (c) provided any evidence as to either applicants' ability to satisfy any further adverse order for costs. 30 As to the respondents' application for release of security in the amount of $48,598.46, together with interest, the respondents submitted that the Court was empowered to make that order under s 23 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and rule 1.32 of the Federal Court Rules 2011 (Cth) (the 2011 FCRs). They submitted that, having regard to the history of the proceedings and the matters referred to above, it is in the interests of justice that orders be made to release the required amount, together with interest, from the applicants' existing security. 31 As to their application for further security, the respondents relied on s 56(3) of the FCA Act, s 1335 of the Corporations Act 2001 (Cth) and rule 19.01 of the 2011 FCRs. The respondents emphasised that the applicants have proffered no evidence in relation to their capacity to satisfy any further costs order and the existing evidence indicates that they are unable to satisfy the existing costs orders or any future adverse costs orders. 32 The respondents properly acknowledged that their interlocutory application constituted a variation of the existing security for costs order and that they needed to demonstrate a material change in circumstances (citing Truth About Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd [2001] FCA 1603 at 11 per Hely J). 33 To that end, the respondents pointed to the following matters as amounting to material changes: (a) as noted, on 21 February 2020, the applicants offered to pay $45,000.00 to the respondents over a 12 month period in respect of the costs order dated 8 October 2019; (b) on 17 March 2020, the ACT Court of Appeal published its decision on costs and ordered the first applicant to pay the Law Society's costs; (c) on 27 March 2020, the Federal Court ordered the applicants to pay the respondents' costs (as agreed or assessed), which costs were payable immediately; (d) on 9 April 2020 (i.e. more than 8 months from when the original pleadings were filed), the applicants filed the fourth amended originating application and fourth further amended statement of claim; (e) on 9 April 2020, the certificate of taxation (Taxed Costs) was issued by the Registrar in the amount of $48,598.46; (f) the applicants have not paid the Taxed Costs; (g) the likely costs the respondents will incur in defending the proceeding, as assessed by Ms Taylor, due to the applicants' delay in pursuing the proceedings (Capital Webworks Pty Ltd v Adultshop.com.Limited [2008] FCA 40) has increased significantly; and (h) subject to any order the Court may make in response to the respondents' application for release of the $48,598.46, the security given by the applicants may have been largely eroded. 34 The respondents also submitted that the Court should have regard to the quantum of their risk including: (a) the total costs owing by the applicants is estimated at $142,384.68; (b) the respondents' costs between the August application and the 27 March 2020 costs order were $61,538.00; and (c) the respondents' instructing solicitor opines that the 27 March 2020 costs order will be assessed in the vicinity of $40,000.00 and that the total costs of the defence of the proceedings from this point will be between approximately $60,000.00 and $96,000.00 in addition to the costs already incurred by the respondents.

Release of an amount from the applicants' security lodged on 5 November 2019 35 I accept the respondents' contentions that, having regard to the history of the proceedings and the matters referred to above, particularly the applicants' failure to date to pay any of the respondents' costs, that an amount of $48,598.46 (i.e. the Taxed Costs plus interest from 9 April 2020) should be released from the current security provided by the applicants, together with interest. The applicants consented to that order at the interlocutory hearing today.

Further security for costs 36 In Hill v Zhang [2019] FCA 1562 at [25] to [38], I summarised the relevant legal principles guiding the Court's discretion to make an order for security for costs. I will not repeat that summary here (which addresses the relevant requirements of s 56 of the FCA Act 1976 (Cth), rule 19.01 of the 2011 FCRs and s 1335(1) of the Corporations Act 2001 (Cth)), but will treat it as incorporated in these reasons for judgment. It is worth adding, however, a reference to French J's observations in East Grace Corporation v Xing (No 1) [2005] FCA 219 at [6] that the question whether security should be awarded and, if so, in what amount, is one of "risk management" between the parties having regard to their legitimate interests. It should also be noted that, at least in cases of trials, there is a very strong disinclination on the part of the Court to make an order requiring an impecunious individual to provide security for costs, as referred to by Bowen LJ in Cowell v Taylor at p 38. It is to be noted, however, that security for costs are sought here by the respondents against both applicants jointly and severally and that the second applicant is a corporation which is controlled by the first applicant. 37 Additional relevant legal principles were also discussed by Gleeson J in Austcorp Project Number 20 Pty Ltd v L M Investment Management Ltd (in liq) [2014] FCA 1371 at [17] to [31] and the cases referred to therein, with which I respectfully agree. 38 Applying those legal principles to the circumstances here I make the following findings.

(a) Have the respondents satisfied the jurisdictional issue under s 1335 of the Corporations Act? 39 The jurisdictional issue for the purposes of s 1335 of the Corporations Act 2001 (Cth) is whether, by reference to credible testimony, there is reason to believe that the second applicant, Initiative Holdings Pty Ltd, will be unable to pay the respondents' costs if they succeed. This requirement has two elements: (a) the likely quantum of the respondents' costs; and (b) the ability of the second applicant to pay costs in that amount. 40 The respondents have an evidentiary onus of satisfying the Court that the second applicant will be unable to meet their reasonable costs if they succeed in their defence. If that jurisdictional issue is met, the evidentiary burden then shifts to the second applicant to satisfy the Court that, taking into account all relevant factors, the Court's discretion should be exercised by refusing to order security or by ordering security in a lesser amount. 41 As noted in Hill v Zhang [2019] FCA 1562, the issue is more complicated where there are overlapping claims brought by an individual person and a corporate applicant. The appropriate approach to be taken in such a case is that described by Austin J in Fiduciary Ltd v Morningstar Research [2004] NSWSC 664; 208 ALR 564, which is summarised in Hill v Zhang [2019] FCA 1562 at [35]-[38]. 42 Applying that approach here, the evidence regarding the financial means of the second applicant is similar to that which was put before the Court in Hill v Zhang [2019] FCA 1562 at [39]. I accept Ms Taylor's evidence concerning the likely quantum of the respondents' costs. I am satisfied that the respondents have satisfied the jurisdictional issue. 43 Furthermore, I am also satisfied on the basis of Ms Taylor's evidence that there is a real doubt whether the first applicant has the financial means to pay the respondents' costs of the proceeding in the event that the respondents were to succeed.

(b) Assessment of the strength of the applicants' case 44 For the same reasons as given in Hill v Zhang [2019] FCA 1562 at [40]-[41], I find that, on an impressionistic basis, the applicants' claims are bona fide and have a reasonable prospect of success. On the basis of the material presently before the Court, however, the Court is not in a position to determine the validity of the applicants' repeated assertion that they have "good claims" which are "very likely to succeed" and produce an award of damages of approximately a half a million dollars plus costs. I note that the respondents are yet to file a defence or any detailed evidence on the substantive matters but, as Edelman J observed in Australian Battery Distributors Pty Ltd v Robert Bosch (Australia) Pty Ltd [2015] FCA 1164 at [32], those circumstances provide "a classic instance where it is inappropriate to descend into a consideration of the prospects of success".

(c) Other relevant considerations 45 I see no reason to vary the analysis and findings set out in Hill v Zhang [2019] FCA 1562 at [44] to [48], taking into account the additional and updated evidence before the Court. 46 The applicants have adduced no sufficient evidence to demonstrate that an order for further security for costs in the amount sought by the respondents will stifle the proceeding. 47 Ms Taylor's evidence demonstrates that the applicants, collectively and individually, have a history of being ordered to pay, but not in fact paying or dealing at least with the paying of the respondents' costs. As noted, the applicants recently agreed to pay the respondents' costs in ACD14/2019. It is also noted that Mr Hill has agreed with the ACT Law Society that he will pay their costs in separate proceedings in the amount of $5,000.00 per month commencing on 1 November 2020. Self-evidently the agreed monthly payment of $5,000.00 per month will take up almost one-half of Mr Hill's monthly salary, after November 2020. Furthermore, it was only today in the course of the hearing that the applicants agreed to the release of the existing security. 48 There is no suggestion that the respondents have delayed unreasonably in seeking a further order for security. 49 No persuasive evidence has been advanced which suggests that the financial position of either applicant has been adversely affected in a material way by the respondents' own conduct. The highest the evidence goes is that of Mr Hill who said that although he was meeting his financial obligations, this has proven to be difficult at times as he was relying upon the sale proceeds of his legal practice. 50 That brings me to the applicants' central claim that the poverty of an applicant is not a sufficient basis to justify an order for security. On its face, there appears to be some tension between the criteria in rule 19.01(3)(a) and (d) of the 2011 FCRs. The former criterion requires that an affidavit in support of an application for security for costs should state whether there is reason to believe that the applicant will be unable to pay the respondent's costs if so ordered, whereas subparagraph (d) requires the affidavit to also state whether the applicant is impecunious. It is notable that Mr Hill did not claim in his affidavit that he was impecunious. On the contrary, he drew attention to his current monthly salary. As I have noted above, however, it would appear that the agreement he has with the ACT Law Society to pay their costs, commencing in November 2020, will involve almost one-half of his salary and the applicants have also very recently agreed to pay the respondents' costs in ACD14/2019. Despite these developments, Mr Hill did not claim to be impecunious or provide any evidence to support any such claim. There is good reason to believe, however, based on the history of the proceedings and the financial position of both applicants, that they will not be able to pay the respondents' costs, if so ordered. 51 I am also satisfied, based on Ms Taylor's evidence, that the quantum of the additional security sought is reasonable and that the timeframe within which such security is to be provided is also reasonable. 52 As to the second applicant, having regard to its limited paid up capital, I am comfortably satisfied that it will be unlikely to pay any adverse costs order. I also note that the second applicant's apparent lack of assets is insufficient not to make an order for security which is otherwise appropriate unless it is established that those who stand behind the second applicant are also without means (see Bell Wholesale Co Ltd v Gates Export Corporation [1984] FCA 29; 2 FCR 1). I repeat and adopt the findings I made concerning the relationship between the claims raised by the first and second applicants in Hill v Zhang [2019] FCA 1562 at [44]-[45]. 53 None of the other matters raised by the applicants in their outline of submissions or in oral address weighs heavily against ordering that additional security be paid. In particular, I consider that little, if any, weight should attach to the applicants' contentions that security should not be ordered because neither of the applicants is a merely "nominal plaintiff", or because the respondents have not yet filed a defence (see McHugh J's observations on the nature of the weighing exercise as part of the exercise of the Court's discretion in P S Chellaram v China Ocean Shipping Co [1991] HCA 36; 102 ALR 321 at 323). Likewise, I do not attach any significant weight to the fact that the applicants complied with the existing order for security for costs having regard to their failure until today to agree to pay the Taxed Costs. These matters are comfortably outweighed by the considerations which favour the applicants being ordered to pay security for costs. 54 Moreover, given that the Court will order the release of significant funds from the existing security, little if anything will remain to secure the respondents' costs for the future conduct of the proceeding. Finally, I do not accept the applicants' submission that requiring further security will foreclose their claims for relief. I have already indicated that the applicants have not persuaded me that further security will stifle the proceeding. 55 Having regard to all these matters, I am satisfied that an order should be made that the first and second applicants be jointly and severally liable to give additional security for the respondents' costs in the amount of $100,000, which broadly reflects the estimate given by Ms Taylor in [45] of her affidavit affirmed on 12 May 2020. That amount should be paid in the form of a bank guarantee (or in such other form as is acceptable to the Registrar) to be lodged with the Registrar and a copy of which is to be served promptly on the solicitor for the respondents. The bank guarantee (or other acceptable form of security) is to be lodged with the Registrar within 28 days hereof. I also consider that the proceedings should be stayed until that security for costs have been provided as required by the orders. 56 Having regard to the history of the proceedings and the applicants' conduct as referred to above, including its failure to pay any of the respondents' costs until it belatedly consented during the course of the hearing today to the release of the amount sought by the respondents, I consider that a guillotine order should be made. Accordingly, if the applicants fail to provide security for costs in accordance with the formal orders, the proceedings will be dismissed. A guillotine order will give the parties certainty. 57 The respondents are entitled to have the costs of their successful interlocutory application. 58 Appropriate orders will be made accordingly. I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Griffiths.

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