Jin Lian Group Pty Ltd (in liq) v ACapital Finance Pty Ltd

Supreme Court of NSW|2021-09-10|Before: Stevenson J, Corp Pty J

Solicitors: Holman Webb Lawyers (Plaintiff) Arnold Bloch Leibler (First Defendant) Henry William Lawyers (Second Defendant) File Number(s): 2019/204875

Judgment

I gave judgment in this matter on 29 July 2021. [1] These reasons assume familiarity with that judgment. I will use the same abbreviations.
I found that each of Jin Lian's claims against ACapital and ACIM failed. I dismissed the proceedings.
I am now dealing with costs.
Three issues arise: 1. whether ACapital should have its costs on an indemnity basis from 17 January 2020 or 8 April 2021, by reason of offers of compromise served on 16 January 2020 and 7 April 2021 respectively; 2. whether ACapital should have a costs order against the funder of the litigation, Premier Litigation Funding Pty Ltd (the "Funder"); and 3. whether the $149,271.65 paid into Court on behalf of Jin Lian and as security for ACapital's costs, should be paid out to ACapital now pending ACapital's assessment of its costs.
There is no dispute that Jin Lian should pay ACIM's costs on the ordinary basis nor that the smaller amount of $21,025 paid into Court as security for ACIM's costs should now be paid out to ACIM. ACIM does not seek an order against the Funder.
The Funder has been served with ACapital's application that it pay costs and has made submissions and adduced evidence on that question.

The offers of compromise

ACapital served on Jin Lian two offers of compromise in accordance with Uniform Civil Procedure Rules 2005 (NSW) r 20.26.
The first offer, served on 16 January 2020, proposed that ACapital pay Jian Lian $35,000 in full and final settlement of its claims.
The second offer, served on 7 April 2021, proposed that ACapital pay Jin Lian $183,000 in full and final settlement of its claims.
Jin Lian does not dispute that, based on its refusal to accept the second offer, ACapital should have its costs on an indemnity basis from 8 April 2021.
As to the 16 January 2020 offer, as ACapital has achieved a result "no less favourable" than that offer, it is entitled to indemnity costs from the date of that offer unless the Court "orders otherwise". [2]
Jin Lian resists ACapital's application for indemnity costs on two bases.
The first is an asserted entitlement to rely upon UCPR r 20.26(4) which provides: "If the offeror makes an offer before the offeree has been given such particulars of the offeror's claim, and copies or originals of such documents available to the offeror, as are necessary to enable the offeree to fully consider the offer, the offeree may, within 14 days of receiving the offer, give notice to the offeror that - (a) the offeree is unable to assess the reasonableness of the offer because of the lack of particulars or documents, and (b) in the event that rule 42.14 applies to the proceedings, the offeree will seek an order of the court under rule 42.14(2)."
Relying on UCPR r 20.26(4), Jin Lian responded to the first offer by seeking particulars of the basis on which ACapital sought to defend Jin Lian's claims. Those particulars were not provided within the time limit specified in the offer. It followed, Jin Lian contended, that it could not assess the reasonableness of the first offer.
In my opinion, UCPR r 20.26(4) has no application in the present circumstances as the rule only applies to an offer made by a plaintiff, and not an offer made by a defendant.
I agree with the observations of Davies J in Raad v VM & KTP Holdings Pty Ltd atf VM & KTP Nguyen Family Trust (No 2) [3] where his Honour held that UCPR r 20.26(4) does not apply to an offer made by a defendant. His Honour said: [4] "There was no obligation to provide particulars by the Defendant because the Defendant as offeror was making no claim on the Plaintiff. Rule 20.26(4) appears to apply only where the Plaintiff is the offeror. This is for two reasons. First, in the ordinary course a claim is made by a plaintiff and not a defendant. Secondly, r 42.14 (referred to in r 20.26(4)) is a rule which operates only where the offer has been made by a plaintiff."
However, the wider question arises as to whether it was unreasonable of the Liquidators to reject the 16 January 2020 offer, a matter relevant to whether the Court should order "otherwise" for the purpose of UCPR r 42.15A. [5]
In its opening outline of arguments, the Liquidators calculated Jin Lian's potential recovery in these proceedings as being in the order of $3.6 million.
As my principal judgment shows, the Liquidators' case involved complicated and difficult questions of construction as well as issues raised by the Liquidators' third line forcing argument. On 25 November 2019, Jin Lian had received advice from senior counsel to the effect that it had good prospects of succeeding in relation to these claims. [6]
Bearing in mind the amount Jin Lian stood to gain were the Liquidators' contentions found to be correct, ACapital's offer was in substance an invitation to the Liquidators, and thus to Jin Lian, to capitulate. I do not think it was unreasonable in these circumstances for the Liquidators not to accept that offer. I am persuaded that I should order "otherwise" for the purpose of UCPR r 42.15A.
The result is that ACapital should have its costs against Jin Lian on the ordinary basis to 7 April 2021 and on an indemnity basis thereafter.

Third party costs order against the Funder

The Court has power to order that a non-party pay costs. [7]
Matters relevant in determining whether it is appropriate to make such an order include whether the non-party: 1. provided the funds for the litigation; [8] 2. had a direct interest in, and entitlement to, a substantial part of the fruits of the litigation; [9] 3. was involved in the litigation purely for commercial gain; [10] 4. had a right to information and involvement in decision making in relation to the litigation; [11] and 5. agreed to provide an indemnity to the unsuccessful party for any adverse costs order. [12]
Each of those factors is present here.
However, as the Funder emphasised, its role in this litigation was different to that commonly encountered in, for example, class actions. It did not instigate the proceedings, nor fund the proceedings from the outset. The funding it provided was in substance limited to the provision of security for costs. Nonetheless, for reasons I will describe, the funding it provided proved to be the decisive factor in the continuation of the proceedings to trial.
Jin Lian is in liquidation and is without funds.
Jin Lian, by the Liquidators, commenced these proceedings on 2 July 2019.
On 18 February 2020, Henry J ordered that Jin Lian pay security for ACapital's costs in the sum of $149,271.65. Her Honour ordered that the first tranche of $68,257.20 was to be paid into Court by 27 March 2020 and the second tranche of $81,014.45 was to be paid into Court no later than 14 days after the proceedings had been set down for trial.
Jin Lian did not provide security in accordance with those orders. The date for payment of the first tranche was extended by consent. The extended date was also not met.
ACapital then applied to have the proceedings dismissed for failure to provide the security ordered.
In the meantime, the Liquidators approached a number of litigation funders without success.
On 19 May 2020, a principal of Ferrier Silva, the firm in which the Liquidators are or were members, Mr Geoffrey Granger, contacted Mr Douglas Whelan, a director of the Funder and had the following conversation: "[Mr Granger]: We are looking for some funding to provide security for costs to be paid into Court and funding to pay barrister fees associated with the security for costs hearing. Can you help? [Mr Whelan]: Subject to receiving a favourable barrister's opinion on the underlying merits of the case - 'probably'. Given our lack of knowledge surrounding the case we would not be in a position to fund any other costs going forward. [Mr Granger]: We have those covered but funding for security for costs is required."
On 30 June 2020, the Liquidators entered a "Litigation Funding Deed" with the Funder. I will return to the terms of that document below.
On 19 June 2020, Hammerschlag J determined ACapital's dismissal application by making orders dismissing the proceedings with costs, with such orders being stayed up to and including 14 August 2020, with the dismissal to be dissolved if Jin Lian paid the first tranche of security of $68,257.20 by that date.
On 6 August 2020, the Funder paid the first tranche of security and the conditional dismissal was dissolved.
The Funder also paid the second tranche of security and the proceedings continued to trial and judgment.
ACapital seeks an order that the Funder pay its costs from 6 August 2020, being the date that the first tranche of security was provided.

The funding arrangements

Pursuant to the Litigation Funding Deed, the Funder agreed to: 1. provide funding for the Liquidators' legal costs up to a limit of $30,000; 2. pay a fixed management fee of $5,500; and 3. indemnify the Liquidators against any adverse costs payable by the Liquidators to ACapital or ACIM up to $150,000.
As to the funds to be paid into Court for security for costs, the Funder took out an "after-the event" or "ATE" insurance policy (the "ATE Policy") with Hamilton Syndicate 4000 at Lloyds (the "ATE Insurer"). The ATE Policy named Jian Lian as the "insured".
Pursuant to the ATE Policy, for a premium of $54,175 (the "Premium"), the ATE Insurer "agreed to bear the financial risk of an indemnity of up to $150,000". [13] The Funder paid the Premium to the ATE Insurer. The ATE Insurer advanced $150,000 to the Funder and the Funder used those funds to provide the security for costs in accordance with the Court's orders. The effect of the ATE Policy was that, if Jin Lian achieved a "Positive Outcome" in the proceedings, it was obliged to repay the $150,000 to the ATE Insurer.
The actual amount of money advanced by the Funder under the Litigation Funding Deed was $108,643.15, comprised of: 1. $20,296.65 paid on or about 11 June 2020 to be paid into Court as security for ACIM's costs; 2. the $54,175 Premium; 3. the $5,500 fixed management fee; and 4. $28,671.50 paid on or about 19 November 2020 for work done by the Liquidators' senior and junior counsel prior to the date of the Litigation Funding Deed in respect of security for costs.
Under the Litigation Funding Deed, the Funder was entitled to be paid an "Additional Sum" being a share of any recovery in the proceedings calculated as follows: "An amount representing a multiple of three (3) times the Funding Advanced such that the Additional Sum does not exceed 75% of the Net Recovery Proceeds. Further, if the Final amount exceeds $1 million, the Funder will receive a 10% of any amount recovered over $1 million - for the avoidance of doubt, this is in addition to the three times multiple."
The "Funding Advance" was the $108,643.15 referred to above.
The Funder thus stood to obtain a significant financial return for its investment if the Liquidators' claims were to succeed. Mr Whelan set out 23 separate recovery scenarios in an annexure to his Affidavit. On Mr Whelan's worst recovery scenario, $300,000, Mr Whelan calculated the Funder's profit would be $181,017.64. On the other hand, on the best recovery scenario, a recovery of $3,629,312.64, Mr Whelan calculated that the Funder's profit would be $618,860.72. The Funder's motivation in entering into the Litigation Funding Deed with Jin Lian can only have been to achieve such profit.
Pursuant to the Litigation Funding Deed, the Funder was entitled to "detailed reports on the status and progress of the Proceedings as reasonably requested from time to time" and "at more frequent intervals as may be required by the Funder should the need arise". [14] It was also entitled be consulted in relation to any settlement discussions, and to have any dispute about settlement referred to senior counsel, albeit with Jian Lian having the final say about settlement. [15]
In fact, the Funder did not seek to be involved in the Liquidators' conduct of the proceedings. Mr Whelan was informed of the second offer of settlement and agreed that it should be rejected. I return to this below.

The Funder's position

On behalf of the Funder, Mr Bender submitted that either there should be no order for costs made against the Funder, or alternatively: 1. the Funder should pay only 25% of ACapital's costs; 2. such costs should be assessed on the ordinary basis and without regard to Jin Lian's failure to accept the second offer; and 3. the Funder's liability be joint and several with that of Jin Lian such that, if the funds in Court were released to ACapital, the Funder's liability be discharged to that extent.
Mr Bender submitted that a factor relevant to whether the Funder should bear the costs of the proceedings was that the Funder had not funded the entire litigation. As I have set out above, under the Litigation Funding Deed, the Funder only agreed to provide funding for the Liquidators' legal costs up to $30,000. The only amount actually paid for "legal costs" was the $28,671.50 paid in November 2020 for the costs of work done by counsel in relation to the security for costs issue.
The Liquidators' total costs for the proceedings were some $289,958.96. Thus, the amount provided by the Funder for Jin Lian's legal costs, as opposed to security for ACapital's and ACIM's costs, was only some 10% of that amount.
Of course, in addition to providing the funding for those legal costs, by paying the Premium, the Funder procured the issue of the ATE Policy and thus the funds necessary to pay the security for costs ordered by the Court.
That was a vital development so far as concerned Jin Lian and the Liquidators. Had that security not been provided the proceedings would have been dismissed on 14 August 2020. That is because, on that date the stay to the orders made by Hammerschlag J on 19 June 2020 that the proceedings be dismissed would have expired.
Thus, but for the intervention of the Funder in mid-2020, the proceedings would not have continued.
Mr Bender submitted that, whilst it is "strictly true in a causative 'but-for' sense that the proceedings could not have continued but for the funding provided by [the Funder], the same is true of the cover provided by the ATE Insurer and funding provided by the [L]iquidators".
Mr Bender continued that "as a necessary corollary of the limited nature of the funding provided by [the Funder], it was one of three non-parties to provide funding that permitted the proceedings to continue". The other two "non-parties" were said to be the ATE Insurer and the Liquidators.

The ATE Insurer

Mr Bender submitted that the ATE Insurer: 1. would in effect bear some $100,000 of the amount paid by way of security for ACapital's costs, being the difference between the Premium and the $150,000 advanced under the ATE Policy; 2. "obtained the benefit of the premium payment" and "assumed the risk, after the proceedings had been commenced, that [Jin Lian's] claim would fail in exchange for a premium and thereby became the ultimate source" of the funds paid by way of security for ACapital's costs; 3. "voluntarily assumed the risk that, if the proceedings were unsuccessful", it would lose its "investment"; and 4. was, in that respect "in the same position" as the Funder.
I do not see this as a fair characterisation of the ATE Insurer's role. It played no role, independent of the Funder, in the funding of the proceedings. The Funder procured the ATE Policy. This represented the means by which the Funder procured the funds necessary to provide the security for costs ordered by the Court. It thus represented a risk allocation device that the Funder chose to implement to carry out its role as Funder. I do not see the ATE Insurer's position as being in any way analogous to that of the Funder.

The Liquidators

So far as concerns the Liquidators, Mr Bender pointed to the fact that Jin Lian's total legal expenses in the proceedings are $289,958.96 comprising: 1. The $28,671.50 paid by the Funder on 19 November 2020 referred to at [42(d)] above; 2. $56,089.18 paid to Jin Lian's solicitors from realisations in the liquidation; 3. a further $95,844.90 in legal fees paid to Jin Lian's solicitors by the Liquidators themselves; 4. $51,920 in legal fees rendered by Jin Lian's senior counsel but not yet paid; 5. $53,201.38 in legal fees incurred by Jin Lian's solicitors which also remain unpaid; and 6. $4,232 for hearing fees in the Court which also remain unpaid.
In those circumstances, Mr Bender submitted: "On the assumption that the liquidators will ultimately have to pay [Jin Lian's] unpaid legal costs, the [L]iquidators will personally contribute about twice the amount paid by [the Funder]. The [L]iquidators were the parties with control over the litigation (including the rejection of the First and Second Offers). The [L]iquidators are therefore far more responsible for the incurring of costs by the First Defendant in the proceedings than [the Funder] by virtue of both the [L]iquidators' control of the proceedings and their provision of about twice the funding."
Mr Bender continued that "it would not be just for [the Funder] to be the only non-party required to pay [ACapital's] costs in these circumstances".
Alternatively, Mr Bender submitted that as the Funder provided only about a quarter of the funds required by Jin Lian to conduct the litigation and only about a quarter of the "external funding" Jin Lian obtained, any costs order against the Funder should be limited to 25% of ACapital's costs.
That submission assumes that the payment of $150,000 made by the ATE Insurer should be treated as part of the "external funding". For the reasons I have set out, I do not accept that the ATE Insurer's role should be so characterised.
Turning to the position of the Liquidators, the evidence does not reveal why, when or in what circumstances the Liquidators themselves funded Jin Lian's costs in the sum of $95,844.90 referred to at [57(c)], nor what the Liquidators propose to do in relation to the unpaid fees of Jin Lian's senior counsel and solicitors referred to at [57(d)] and [57(e)] above. The evidence does not reveal what the arrangements are between the Liquidators, senior counsel and the solicitors. It may be, as Mr Bender submitted, that the Liquidators will ultimately themselves pay those amounts. However, although Mr Granger swore an Affidavit on this application in support of the Funder's position, he gave no evidence to this effect. The Liquidators will certainly have to pay the outstanding hearing fees, if funds are otherwise unavailable from Jin Lian itself.
It may be that, for some time at least, the Liquidators were prepared to speculate on the success of these proceedings, perhaps relying upon the advice of senior counsel to which I referred at [19] above.
It may also be that the matter would not have proceeded to trial without the Liquidators funding the proceedings. Evidently the Liquidators were not prepared to use their own funds to provide the security for costs ordered by Henry J. But the evidence does not reveal what role, if any, any funding from the Liquidators played in the matter proceeding to trial. The matter is unexplained, despite the Funder adducing evidence in support of its position from Mr Granger.
What is certain is that the proceedings would have come to an end on 14 August 2020 had the Funder not agreed to provide the funding called for by the Litigation Funding Deed.
In those circumstances, I cannot see any justification for the submission that the Funder should bear no costs of the proceedings. Nor can I see why I should, in effect, apportion the Funder's liability for costs as between it and the Liquidators (let alone as between it and the ATE Insurer) in the manner submitted by Mr Bender.
The Funder agreed to involve itself in these proceedings purely for financial gain. Its Litigation Funding Deed is a sophisticated and extensive document. It was open to the Funder to negotiate with the Liquidators that, were the proceedings to fail, the Liquidators share with it any potential liability for costs.
Litigation funders should be aware that if they involve themselves in pending court proceedings in circumstances where their intervention is the factor that causes those proceedings to continue and go to trial, they risk an adverse costs order. Here the Funder took a gamble. It knew its involvement was to pay security for costs. It must have appreciated that it was likely, if not certain, that but for such payment the proceedings would not continue. Now that the proceedings have failed, I see no reason why it should not be jointly and severally liable for ACapital's costs, including the costs that are to be paid to ACapital on an indemnity basis.
This is particularly so in circumstances where Mr Whelan was aware of the second offer and agreed with Mr Granger that it should be rejected.
In that regard, Mr Whelan deposed to having this conversation with Mr Granger on 8 April 2021: "[Mr Granger]: We received an offer to settle for $183,000. I have no intention to settle as this does not even cover legal costs, costs of the liquidation or your costs. Let alone any return to creditors. [Mr Whelan]: I understand given the circumstances and support your decision not to settle. If you want to settle, we can be flexible around our entitlement."
Mr Whelan said that: "Mr Granger did not tell me that the offer was in writing. Had I known that it was a written offer, I would have asked to be provided with a copy of it. At the time of the call, I understood the offer to have been made in informal discussions between the parties' lawyers as it was communicated to me verbally. This was also consistent with my experience in other matters where there is 'backwards and forwards' conversations between the lawyers close to trial and during trial with a view to agreeing a settlement. At no time were the terms or the form of the offer disclosed to [the Funder] other than in the conversation set out above. As [the Funder] did not have any involvement in the conduct of the Proceedings and because I understood from the conversation set out above that Mr Granger was adamant about not accepting the offer, I supported his decision."
Mr Whelan has only himself to blame for his failure to interrogate Mr Granger about the nature of the offer made. He cannot now use his failure to inquire more closely as a reason to resist the consequences of the offer not being accepted.
For those reasons I propose to order that the Funder be jointly and severally liable for ACapital's costs from and including 6 August 2020, and including indemnity costs from 8 April 2021.

Release of security

The Court may order that money paid into Court as security for costs be paid out to the successful party before the amount of costs has been agreed or assessed if the Court can be satisfied that the amount that will be ultimately payable to the successful party will exceed the amount in Court. [16]
The Liquidators submitted that there was "serious doubt" as to whether ACapital's costs, on assessment, would exceed the amount paid into Court and pointed to what they contended to be some examples of "excessive charging" by ACapital's solicitors.
In support of their contention that ACapital's legal expenses were unreasonably high, the Liquidators characterised these proceedings as: "… a matter that occupied 2 trial days, in which no witnesses were cross examined, and in which the Plaintiff was required to prepare all Court Books, and the substantive issues in contest were matters of interpretation of commercial loan agreements …".
That description oversimplifies matters.
As was submitted on behalf of ACapital there were: "a. three separate substantial hearings and numerous other appearances, including: i. several appearances in the Real Property List, where the plaintiff commenced, to deal with, amongst other things, disputes about whether the plaintiff should be required to serve Points of Claim (a course it resisted) and the transfer of the proceeding to the Commercial List); ii. a contested security for costs hearing before Henry J on 14 February 2020, in respect of which it was necessary for the first defendant to brief different counsel; iii. appearances in the Commercial List (requiring the preparation of position papers, given the COVID-19 restrictions), connected with the plaintiff's failure to pay security for costs as ordered, including an application for dismissal of the proceeding for failure to provide security; iv. a final hearing before Stevenson J on 22-23 April 2021; and v. a further final hearing before Stevenson J on 9 June 2021, which was substantially occasioned by the plaintiff's failure to join a necessary party (ACIM, the second defendant) or give sufficiently close consideration to the jurisdictional difficulties attendant on bringing its third line forcing claim in this Court; and b. preparing evidence responding to the claims that various clauses were unenforceable penalties and the claim of third line forcing under the Competition and Consumer Act 2010 (Cth)."
ACapital's actual costs are $467,389.05 of which $99,942.10 comprise counsel's fees and other disbursements.
It may well be that, on assessment, ACapital's costs will be allowed at a figure less, perhaps significantly less than the actual costs incurred. However, the Liquidators' proposition that there is "serious doubt" that ACapital's costs will exceed $149,271.65 involves acceptance of the further proposition that only some 30% of ACapital's actual costs will be allowed on assessment.
There does not appear to me to be any realistic prospect that this will be the result of the assessment process, especially in light of the indemnity costs order that Jin Lian accepts must be made.
I accept ACapital's submissions that their costs will certainly exceed the amount in Court and that, therefore, the money should be paid out to ACapital immediately.
It follows that the Funder's obligation to pay ACapital's costs will be discharged to that extent.

Conclusion

The parties should confer and agree on the orders necessary to give effect to these reasons.
So far as concerns the order that the funds in Court be paid out to ACapital, the parties should consider whether an order under UCPR r 36.4(3) is necessary or appropriate.

Endnotes

Jin Lian Group Pty Ltd (in liq) v ACapital Finance Pty Ltd [2021] NSWSC 931.
UCPR r 42.15A.
[2016] NSWSC 1233.
At [26].
See for example, Mendonca v Tonna (No 3) [2020] NSWCA 332 at [24] (Bell P, Meagher and Payne JJA).
The advice has been placed into evidence by the Funder in its evidence in response to ACapital's costs claim against it.
For example, Yu v Cao (2016) 91 NSWLR 190; [2015] NSWCA 276 at [136]-[137] (McColl JA with whom Sackville AJA and Adamson J agreed).
FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 at [210] (Beazley, Giles and Basten JJA).
Carter v Caason Investments Pty Ltd [2016] VSCA 236 at [38] (Weinberg, Ferguson and Kaye JJA); FPM Constructions at [210].
Carter v Caason at [38].
Carter v Caason at [38].
Gore v Justice Corp Pty Ltd (2002) 119 FCR 429; [2002] FCA 354 at [35] (O'Loughlin, Whitlam and Marshall JJ).
To adopt Mr Whelan's words.
Clause 8.1
Clause 8.9.to 8.13
For example, Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (No 2) [2010] NSWSC 490 at [41] - [45] (White J, as his Honour then was); approved and applied in Summer Hill Business Estate Pty Ltd v Equititrust Ltd [2011] NSWCA 211 at [21] - [27] (McColl JA). DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 September 2021

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