HP Mercantile Pty Ltd v Anthony William Andrew

Judgment 1The court has before it an application by notice of motion filed on 5 August 2013 in proceedings between HP Mercantile Pty Ltd and Mr Anthony William Andrew that the plaintiff provides security for costs. 2The notice of motion seeks an order that the plaintiff provide security for each of the defendants' costs in a total of 33 separate but substantially similar actions that have been commenced by the plaintiff. The court was informed at the hearing of the notice of motion that there are in fact 35 matters in which the same application for security for costs is made against the plaintiff. Those 35 matters are identified in the First Schedule to the affidavit of Mr Philip Clements, the solicitor for the defendants, sworn on 27 September 2013. 3The parties are agreed that the court should deal with the application on the basis that the court's decision will decide the issue in relation to the 35 actions. I have agreed with counsel that I will invite the parties to bring in short minutes of order to implement the effect of the court's decision. Those short minutes of order can identify each of the 35 actions and make appropriate orders in each proceeding. It is not necessary to identify each of the matters or the names of the separate defendants at this stage. 4The plaintiff commenced proceedings against certain of the defendants in the District Court of New South Wales, and against others in the Local Court. The notice of motion identifies the proceedings that were commenced in each court in relation to the proceedings referred to in the notice of motion. All of the actions were removed into the Supreme Court on 4 July 2013. 5Taking the plaintiff's claim against Mr Andrew as a representative example, the plaintiff claims, by statement of claim filed in the District Court on 21 June 2012, repayment of a loan of $196,944.34, plus interest at a contractually agreed rate. It is sufficient to note that the plaintiff sues as the assignee of a lender under a loan agreement. The principal of the loan was $51,600, and the balance of the sum claimed is comprised of interest. It appears from the statement of claim that the loan was to finance Mr Andrew's participation in what is described as "the Farm Business". The income from the Farm Business was intended to be the primary source of the funds to repay the loan (par 13(b)). 6The court has been asked to proceed upon the basis that the plaintiff's claim against each of the defendants is materially equivalent to the claim against Mr Andrew. 7Mr Andrew filed a defence in the District Court proceedings on 21 August 2012. The evidence is that all of the defendants except two have filed defences. 8On 31 August 2012 White J gave judgment in proceedings commenced by the plaintiff against another borrower, being HP Mercantile Pty Ltd v Dierickx & Ors [2012] NSWSC 1005. The plaintiff's action failed. White J set out his conclusions and orders at [281] - [284]. His Honour found that the plaintiff was entitled to sue for the debt. The defendants did not establish that there was a separate agreement for them to exit the project in relation to which the loan was made. He concluded that the loan was not a without recourse loan, and that the original lender did not engage in misleading and deceptive conduct by representing to the defendants in that case that the loan was without recourse. However, he found that the original lender did represent to the defendants that the monies it lent to them and that they paid to it under the farming agreement would be available for the carrying out of the works described in the farming agreement, and that that representation was false. His Honour found that the original lender failed to comply with its fiduciary duty to disclose to the defendants that the money lent to them and paid back to the lender would not be available as working capital to pay the costs of orchard enhancement and maintenance. His Honour then found that the defendants were entitled to rescind the loan agreement and that the plaintiff was in no better position than the original lender to enforce the loan in those circumstances. 9An appeal by the plaintiff to the Court of Appeal from the judgment of White J was heard on 23 and 24 September 2013. The Court of Appeal has reserved judgment. 10It appears that, influenced in part by the decision of White J, Mr Andrew was advised to amend his defence. He filed an amended defence on 4 September 2013. Superficially the amendments appear to be significant. Detailed submissions were not addressed to the court as to the significance of the amendments, or the extent to which they altered the issues in the case. 11The defendants put in evidence what was called a template defence (see affidavit of Paul Meyer sworn 2 August 2013, annexure PM 8). The evidence is that all of the defendants were given leave to amend their defences at the time the order was made removing all of the proceedings into the Supreme Court. The court was invited to proceed upon the basis that the legal advisors for all 35 defendants, who are the same in each case, are engaged in the process of taking instructions from all of the defendants in order to prepare defences, or amended defences, which will follow the outline of the template defence, to the extent that that is appropriate having regard to the circumstances of each of the defendants. It appears that the amended defence of Mr Andrew is generally consistent with the template defence. The parties did not address any submissions to the extent to which there are any differences, or suggest that any differences would have significance for the purposes of the present application. 12It is not necessary to analyse the template defence in detail. It is sufficient to note that the document contains a proposed allegation that the original lender represented to potential borrowers that so long as a borrower made certain payments, the borrower's obligation to repay principal and interest under the loan agreement was limited to the borrower's income from the project. This was called the non-recourse representation. The representation was said to have been made in a prospectus, in a brochure and project summary provided by a financial planner instructed by the original lender to procure borrowers, and orally at seminars conducted by the financial planner. Another representation alleged, called the funding representation, was that the lender had the ability to finance each borrower's obligation to contribute towards orchard enhancement works and services and maintenance expenses, and that the lender would do so. There is another allegation that the prospectus failed to disclose certain liabilities. The template defence alleges that the representations were false and that they and the non-disclosure constituted misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth), as well as breach of fiduciary duty by the lender. There is also an allegation that the loan agreements are unenforceable under s 8(1) of the Credit (Administration) Act 1984 (NSW). 13If this process proceeds as expected, then it is probable that eventually all of the defendants will file defences or amended defences that raise significant common issues. It is expected that the defences will raise a number of issues that are unique to the particular case, including whether each defendant relied upon the various representations that are expected to be alleged. 14The template defence raises issues that did not arise in the Dierickx case. Furthermore, White J dismissed the claim made in that case that the original lender had made the non-recourse representation. The decision of the Court of Appeal on the appeal in Dierickx may have significant consequences for the plaintiff's prospects of succeeding against the 35 defendants. It is not necessary to analyse the permutations. It is sufficient to note that the outcome of the appeal could at one end of the spectrum in practical terms extinguish the plaintiff's prospects of success. At the other end it could leave all issues proposed to be raised by the template defence alive. 15The court was informed that all of the 35 proceedings have been set down before Registrar Mulgrave on 4 December 2013 for a directions hearing at which it is expected the court will make orders for the future conduct of the proceedings. 16The court has been asked to consider the issue of security for costs at a time when proceedings by the plaintiff against the defendants in lower courts have been on foot for some time, and those proceedings have been removed into the Supreme Court, but the defendants as a group are in the process of preparing defences or amended defences which are expected to follow the terms of the template defence, at least in substance. The court has not yet determined the manner in which the proceedings will be conducted. 17The solicitor for the plaintiff, Mr Geoffrey Versace, in his affidavit sworn on 30 September 2013, sets out in par 56 his expectation as to the likely outcome of the directions hearing. He suggests that it is likely that the 35 Supreme Court proceedings will progress together on a "staged" timetable leading to a point where the parties shall agree to a set of common issues of fact and law which shall be determined at a preliminary hearing, or at the hearing of one or more selected proceedings. Once the preliminary hearing, takes place, all the other issues unique to each proceeding can then be heard. The plaintiff made a submission to that effect in par 7 of its written submissions, and set out likely common issues in par 16. 18 The defendants' solicitor, Mr Philip Clements, in his 2 October 2013 affidavit disagreed with Mr Versace's view as to the most efficient way for the 35 matters to proceed. The difference of opinion was limited in relation to the number of days that it was expected would be required for the court to deal with all of the proceedings, and the overall time estimates measured in days were similar. However, Mr Clements accepted Mr Versace's forecast for the purposes of the determination of the security for costs application. Counsel for the defendants at the hearing reinforced this position. The defendants have in effect attempted to deal with the uncertainties involved in forecasting the future course of the proceedings by accepting the forecast proffered by the plaintiff. 19Mr Versace estimated in par 60 of his 30 September 2013 affidavit that the total costs that the defendants would incur in dealing with the issues common to all proceedings would be $15,300 in solicitors' costs and $15,000 in costs of junior counsel to the end of the preliminary hearing, giving a total of $30,300. Mr Versace estimated in par 61 that once the common issues of fact and law are determined, the determination of the issues separate to each claim would take a further one day to be heard. In par 62 he estimated that total solicitors' and counsel's fees for each separate hearing would be $10,000 per matter. The total for the 35 matters would therefore be $350,000. The total cost would be $380,300. 20Mr Clements set out his response to Mr Versace's estimate in his affidavit of 2 October 2013. It is sufficient for the present to note that he estimated the total cost of the expected preliminary hearing to be $181,500. He estimated the cost of dealing with the separate issues in each matter as being $33,000, giving a total of $1,260,000 for all 35 individual hearings. The total cost estimate is therefore $1,441,500. 21As Mr Clements notes in par 16 of his affidavit, the costs estimates given do not include the costs already incurred by the defendants in the period from the inception of the proceedings against them up to August 2013. Mr Clements gives evidence of these costs in the Third Schedule of his affidavit sworn on 27 September 2013. Apart from one case No 2012/196092 where the costs are $4679.09, and another case No 2012/193391 where costs of $18,242.11 have been incurred, the costs of the proceedings generally fall within a range of about $9000-$11,000, give or take. 22The evidence shows that a number of cases were relatively advanced towards being heard before they were removed into the Supreme Court. Nine of the Local Court cases had been given hearing dates in 2013. One case, called the Bodonyi proceedings, had been fixed for hearing in the Local Court for the period 15 - 19 July 2013, and the parties had exchanged all of their evidence. On 5 July 2013 the hearing was vacated on the application of Mr Bodonyi. 23The defendants make their application for security for costs under UCPR r 42.21 and under s 1335 Corporations Act 2001 (Cth). The former relevantly provides: "(1) If, in any proceedings, it appears to the court on the application of the defendant: ... (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so,... The court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given." 24Section 1335 relevantly provides: "(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given." 25As it happens, the respondents in the Dierickx case made an application for security of the costs of the appeal, which was dealt with by Ward JA in HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87. I respectfully adopt the statement of the principles to be applied in determining the application which are set out by her Honour at [5] - [10]. Her Honour ordered the plaintiff, as appellant in that case, to provide security for the costs of the appeal. 26It is not necessary for the court on the present application to consider in detail the applicable legal principles, or to analyse the evidence that was put before the court on the issue of the financial circumstances of the plaintiff, and its likely capacity to meet all costs orders which may be made against it. It may be noted, however, that the plaintiff's financial statements for the year ended 30 June 2012 showed that the plaintiff's net current asset position was $5,442,553. The net asset position overall was shown as $34,889,822. The only evidence as to the plaintiff's financial position as at the date of the hearing of the application was that the amount of credit in the plaintiff's bank account was only $118,412.96, which the plaintiff's evidence suggested was necessary for the continuing business operations of the plaintiff. Because of the course that the application took, there was no real examination of the present financial position of the plaintiff. It is sufficient to observe that in the present case it is not self-evident that the plaintiff's finances are parlous, or that it could not meet individual costs orders in favour of the defendants, if they were staggered in time. 27The reason why it is not necessary to go into the plaintiff's financial situation in detail is that the plaintiff accepted in submissions that if it is assumed that the plaintiff may fail against all 35 defendants, and may be required to meet costs orders given in favour of those defendants at the same time, the evidence would satisfy the threshold in UCPR r 42.21 and s 1335 concerning the ability of the plaintiff to pay the costs of all 35 defendants, and make it proper for the court to consider making an order for security for costs: (written submissions par 6). 28The plaintiff put forward discretionary reasons as to why the court should not make an order for security for costs. The plaintiff argued that, on the evidence, it probably could have met costs orders if the individual proceedings in the District Court and the Local Court had not been removed into the Supreme Court. The argument was that the plaintiff should not be prejudiced by the course that has been taken in relation to all of the proceedings. That is not a valid basis for ignoring reality. The proceedings have all been removed into the Supreme Court, and it is probable that a substantial part of the issues raised in the proceedings is common between them, and will be determined at the one time. The same lawyers now represent all 35 defendants. There is plainly an efficiency benefit available not only to the defendants but also to the plaintiff from this arrangement. At least in relation to the future conduct of all of the proceedings, they should be regarded as one case until it becomes necessary to consider whether the issues that are particular to individual cases should be dealt with separately. 29The plaintiff also submitted that the court should not make any order for security for costs if the likely consequence would be to stultify the continuation of the actions by the plaintiff. That argument is not persuasive for a number of reasons. The first is that the course that the court proposes to take in ordering security for costs should not stultify the proceedings. Secondly, the plaintiff pointed to evidence given by Mr Ross Chapman, its principal, in his 27 September 2013 affidavit, in which he stated in par 9 that he was prepared to make himself personally liable to pay any costs orders made in favour of the defendants against the plaintiff. Unfortunately for this argument Mr Chapman did not give any evidence of his financial position that could persuade the court that his offer would protect the defendants. However, the fact that the offer was made implies that Mr Chapman believes that he has sufficient financial substance to meet any costs orders that might reasonably be made against the plaintiff. If that is the case, he should be able to fund any security ordered by the court, so that the plaintiff's actions will not be stultified. 30At the conclusion of submissions on the hearing the court advised the parties that it would make an appropriate order for security for costs. It would reserve its decision as to whether any security should be ordered in relation to the costs incurred by the defendants to date, and if so, what the amount of that security should be. In relation to the period between the hearing of the application and the completion of the expected preliminary hearing on common issues, the court would consider the amount of security that should be ordered, and the timetable for provision of that security. The court advised the parties that it would not at this time make any order for security for the costs of the expected individual proceedings, on the assumption that the result of the preliminary hearing is that the issues which are particular to each of the defendants need to be determined. 31The security for costs application has proceeded upon the basis that, if the judgment on the common issues following the preliminary hearing favours the defendants, then it will be necessary for a further one day of hearing to occur in relation to each of the 35 defendants to determine whether each has a good defence against the plaintiff's claim. It follows that, if the plaintiff succeeds on the preliminary hearing, none of the defendants may have a defence. I am extremely sceptical whether, even if the decision on the preliminary hearing has the result that the defences of the defendants remain alive, the court will allocate a total of 35 separate days to hear the remainder of the case against each of the defendants. That amount of time seems to be excessive. While it cannot be ruled out, in my view it is much more likely that the court will impose a much more efficient regime, perhaps using the services of a referee, to ensure that the remaining issues are dealt with quickly and cost effectively. I am very doubtful that the individual parts of each defendant's case would take one whole day. I may be wrong, but the evidence does not justify the court proceeding upon the basis that each defendant is likely to incur the costs of the preparation and conduct of one full day's hearing. The issue is in my view at this stage simply too unpredictable. If the result of the preliminary hearing is that the court must determine the individual issues, the judge who has conducted the preliminary hearing will be much better placed than I am to consider any further application for security of costs, in the light of the directions which he or she gives concerning the future conduct of the case. It was for these reasons that I indicated that I would not now include the costs of determining the individual issues in any order for security for costs that I make. 32The next question that arises is whether the court should include in any amount of security that it orders to be provided a sum to cover the costs incurred by the defendants to date. 33The defendants have waited for some 12 months or so before they have applied for security for costs. No evidence has been put before the court to explain this delay. The individual defendants may well have decided that they would not succeed in an application for security for costs in relation to the individual proceedings against them, although that is a matter for speculation. Almost all of the defendants propose to substantially amend their defences. The court is not in a position on the evidence to determine what proportion, if any, of the costs incurred by the defendants to date will be thrown away as a result of the making of the amendments. On the other hand, the evidence does not enable the court to assess the extent to which the work already done in relation to each case should have provided the defendant's legal representatives with the instructions that they needed. The court notes that Mr Clements has estimated that it will be necessary for eight hours to be devoted to each defendant's case to determine the extent to which the particular circumstances of each defendant meet the expectations incorporated in the template defence. The defendants' collective response to these considerations in submissions was to submit that they did not disentitle the defendants to some security for past costs, but that the proper course for the court to take was to discount the amounts claimed by a larger proportion than may be appropriate in relation to future costs. 34In view of the paucity of evidence available to the court on this issue, the court cannot avoid making a very general determination in the exercise of its discretion in relation to this component of the claim for security. The total amount of the costs incurred by the defendants to 13 August 2013 is $359,694.15. That is a substantial amount relative to Mr Clements' estimate of the total costs of $181,500 that the defendants will be required to incur from now to the end of the expected preliminary hearing of common issues. The costs to date are objectively relatively large, even though it must be accepted that the fact that all of the plaintiff's claims were separate until the matters were removed into the Supreme Court, would have increased the relative costs incurred by each defendant. As I have noted, the estimate for future costs apparently starts with the need for defences or amended defences to be prepared on behalf of all of the defendants. I do not infer that the costs incurred to date have been wasted, but it is the case that the preparation of the defendants' cases will be starting from the stage of preparing defences. The size of the claim for costs incurred to date relative to the costs estimated to complete the preliminary hearing makes the significance of the absence of any evidence concerning the circumstances in which the costs to date were incurred acute. 35 I have come to the view that the considerations outlined above should not disentitle the defendants completely to the provision of some security for past costs, but in all of the circumstances it would be appropriate to order the plaintiff only to provide security equal to one quarter of the amount expended to date by each defendant in the costs of defending the plaintiff's claim against that defendant. That relatively low allowance has been strongly influenced by the amount of the costs incurred to date, the absence of evidence to relate those costs to future costs, and the unexplained delay by the defendants in applying for security for costs. That security should be provided by the plaintiff at the time it provides the first component of the security for the costs of the preparation and hearing of the common issues, to which I will now turn. 36I have given careful consideration to the cost estimates provided by Mr Versace and Mr Clements in relation to the defendants' costs of preparing for the preliminary hearing and then conducting that hearing. It is not in the circumstances necessary for me to conduct a line-by-line comparison of the two estimates. I find that Mr Versace's estimate is patently too low. Taking items (a) "preparation of defence and cross-claim (template)" of four hours and (b) "preparation of defences for and cross-claim for all matters using template" of five hours in par 60 of his affidavit as an example, I believe that those estimates are clearly too low. I also do not accept Mr Versace's view that only junior counsel will be required for the preparation and hearing of the common issues. I agree generally with the estimates made by Mr Clements in his 2 October 2013 affidavit. In particular I agree with Mr Clements that it would be reasonable for the defendants to instruct their solicitor to attend in court for the whole of the preliminary hearing. In some respects I believe that Mr Clements' cost estimates are conservative, which I should add is quite proper on an application such as the present. He estimates that the defendants' solicitor will be required to attend on each client for eight hours in order to obtain appropriate instructions concerning the extent to which the template defence is appropriate to the circumstances of that defendant. That is not an excessive amount of time in my opinion, particularly as the solicitor is responsible for ensuring that each defendant's defence is reasonably arguable. I note that Mr Clements has allowed for senior counsel's fees at $6000 per day, which may be an under-estimate. 37In all of the circumstance I have come to the view that Mr Clements' estimate of $181,500 for the preparation and hearing of the common issues between all 35 defendants is sustainable, if not conservative. Against the possibility that on an assessment the defendants will not be allowed all of those costs, and also on the principle that security for costs will generally not provide a complete cover for the possible costs which defendants may incur, I propose to order that the plaintiff provide security equal to 75% of the amount estimated by Mr Clements. 38My provisional view is that security equal to 75% of the amounts estimated by Mr Clements for items A to G of par 14 of his 2 October 2013 affidavit should be paid within 28 days of the date this judgment is delivered. 75% of the costs estimated by Mr Clements for the remaining legal work described in item H should be paid two months before the date of commencement of any preliminary hearing. I am open to the parties suggesting different times as part of the exercise of bringing in short minutes of order. 39The evidence shows that five of the defendants are indebted to the plaintiff for various reasons that need not now be considered. As I understand it, the defendants accept that the plaintiff should be entitled to set off the debt owed by the relevant defendants against the plaintiff's obligation to pay security to them, at least while those debts are outstanding. The parties asked me to allow the parties to deal with this issue in the preparation of the necessary short minutes of order, as I understand it is proposed that the final orders will require the plaintiff to provide an identified amount of security for each defendant individually, rather than collectively. I will leave this matter to the parties, and deal with any issues that may arise if that happens. 40The parties raised the possibility during submissions that the future course of the proceedings might falsify the assumptions upon which the court has been asked to determine the amount of security for costs that should be provided by the plaintiff. The decision of the Court of Appeal in Dierickx may significantly alter the expected course of the proceedings, one way or another. The parties may agree to mediation. The expectation that the parties can identify common issues of fact and law may be disappointed. It could prove to be that the estimate made by Mr Clements may be inadequate. All of these considerations may be true. However, in my view the first tranche of the security that the plaintiff must provide is not so great as to have the effect that these uncertainties might cause injustice to any of the parties. The structure of Mr Clements' estimate in his affidavit, and these reasons for judgment, should make it reasonably plain to any court that is called upon to determine an application for some adjustment of the security as to what the basis of the order that the count will make is. The future course of these proceedings is in fact so unpredictable that the court cannot do more than to make the order proposed, and leave it to the parties to make any application that they may think appropriate if circumstances change, or do not meet expectations. 41The court will make the following orders and directions: (1)Order the plaintiff to provide security for the costs of the 35 defendants on whose behalf the application was made in accordance with pars 35, 37 and 38 of these reasons for judgment. (2)Direct the parties to bring in short minutes to put into effect these reasons for judgment. (3)The court will hear the parties as to costs. 42The parties did not address any submissions to the court as to the form of security that should be provided by the plaintiff. The defendants did not seek any order that the proceedings be stayed if the required security is not provided by the plaintiff in accordance with the order. The parties should consider these issues in formulating the required short minutes of order.