Ken Tugrul v Tarrants Financial Consultants Pty Limited ACN 086 674 179

Supreme Court of NSW|2013-12-20|Before: Kunc J

Summary 1By Amended Notice of Motion filed 23 July 2013 the Third Defendant (Ms Seco) seeks the following relief: 1. An order pursuant to s.1335(1) of the Corporations Act 2001 (Cth) r 42.21(1)(d) or (e) of the Uniform Civil Procedure Rules 2005 (NSW) or the inherent or implied jurisdiction of the Court that the Plaintiffs give security for the Third Defendant's costs of the proceedings within 14 days of the date of this order in the amount and form determined by the Court. 2. An order that these proceedings be stayed unless and until the security referred to in order 1 is given. 2The Amended Notice of Motion also pressed for other relief. However, as a consequence of my judgment in Ken Tugrul v Tarrants Financial Consultants Pty Ltd (In liquidation) [No 1] [2013] NSWSC 1561 (the "October Judgment") (in which leave was granted to the plaintiffs to file a Second Further Amended Statement of Claim (the "Claim"), the further relief sought in the Amended Notice of Motion was not pressed. 3Furthermore, at the outset of the substantive hearing of the Amended Notice of Motion, Mr A.S. Martin of Senior Counsel, who was then appearing with Ms I. King of Counsel for Ms Seco, informed the Court and the plaintiffs that the relief sought in paragraphs 1 and 2 of the Amended Notice of Motion would only be pursued against the fifth plaintiff ("K Bricks") and not the other four plaintiffs, all of whom are natural persons. 4This change of course would prove to have significant consequences for Ms Seco's application. There is an overlap as to some part of the balance of the claim with K Bricks' claim. While Ms Seco adduced evidence as to her likely costs of defending the proceedings as against all five plaintiffs, she has failed to provide the Court with sufficient evidence on which a rational, evidence based finding can be made as to the amount of costs which she will incur referable only to K Brick's claim against her. Proving that figure is an essential initial step in the application. The Amended Notice of Motion will be dismissed.

Background 5With no disrespect intended I shall refer to the natural plaintiffs by their first names. The first plaintiff ("Ken") and the second plaintiff ("Kellie"), are husband and wife, as are the third plaintiff ("Daniel") and fourth plaintiff ("Nassrin"). Ken and Daniel are brothers. The four individuals together work in the family business of brick laying and property development through, amongst other entities, K Bricks. K Bricks is a company that provides all types of masonry services to builders and building developments. Ken is the sole director of K Bricks. 6These proceedings concern investments made by the plaintiffs in or about June or July 2006 in various agribusiness schemes on the advice and recommendation of their financial adviser, the second defendant (Mr Tarrant). On Mr Tarrant's advice, the plaintiffs also took fixed interest loans to finance the investments in the agribusiness schemes. 7The plaintiffs allege that the agribusiness schemes were speculative, risky and were wholly unsuitable for them. They sue Mr Tarrant as well as the company through which he operated, the first defendant ("TFC"), for breaches of statutory duty, misleading and deceptive conduct and in negligence. 8Ms Seco was an accountant in the employ of Mr Tarrant. The plaintiffs (excluding Kellie) allege she was responsible for the making of certain representations that were misleading and deceptive. 9The fourth defendant is an insurance company that had issued a policy of professional indemnity insurance to TFC. The plaintiffs have been granted leave to proceed directly against the fourth defendant. 10I summarised the procedural history of these proceedings in the October judgment: 7. These proceedings have had a somewhat tortured interlocutory history. 8. The relevant events said to give rise to the defendants' liability took place in 2006. A statement of claim was first filed on 29 October 2009. Between the commencement of the proceedings in October 2009 and today, there have been propounded with various degrees of formality fifteen versions of the plaintiffs' claim. Some of those versions have been prepared pursuant to orders made by the Court. Other versions appear to have been brought into existence as part of an informal process of exchanges between the plaintiffs and the defendants, the latter complaining about the form of proposed pleadings and the former attempting to deal with those complaints. 9. In recent times there has been a change in legal representation for the plaintiffs. This has led to the latest iteration of their claim in the form of the Draft Claim which has been the subject of argument before me today. It was candidly conceded in the plaintiffs' written submissions that they "wish to make a 'fresh start' and to move the proceedings forward as quickly as possible. The proposed pleading is intended to simplify and expose with greater clarity and precision the material facts and the causes of action that are alleged". 11In accordance with the October judgment, the plaintiffs filed the Claim on 4 December 2013. Ms Seco has filed a defence to the Claim. 12For much of the hearing of Ms Seco's motion Mr Tarrant was also prosecuting his own motion for security for costs against K Bricks. However, as a consequence of Mr Tarrant's solicitors and counsel ceasing to act for him over the long vacation, I dismissed his motion (Ken Tugrul v Tarrants Financial Consultants Pty Limited CAN 0806 674 179 (in liquidation) [No 3] [2014] NSWSC 38).

The Claim 13As against Ms Seco the plaintiffs sue for damages under s 1041I of the Corporations Act 2001 (Cth), s 126GF of the Australian Securities and Investment Commission Act 2001 (Cth) and s 68 of the Fair Trading Act 1987 (NSW). The Claim alleges that Ms Seco, Mr Tarrant and TFC were aware or ought to have been aware of a number of matters about each of the plaintiffs relevant to the advice those defendants are alleged to have given. The Claim then alleges that Mr Tarrant and TFC made what are defined as the "Recommendations" to each plaintiff which were acted upon by each of the plaintiffs by investing in certain "Agribusiness Investments" financed by certain "Loans" (both as defined in the Claim). 14Turning to Ms Seco, the Claim then sets out a claim by Ken and K Bricks against Ms Seco, Mr Tarrant and TFC in misleading and deceptive conduct that they made representations to Ken, in his own capacity and as agent for K Bricks, in support of the Recommendations. These are defined as the "Ken and K Bricks Representations". Allegedly in reliance on those representations Ken and K Bricks invested in four out of five identical Agribusiness Investments and took out Loans in different amounts from the same two financiers. 15Finally, in relation to Ms Seco, the Claim then sets out a claim by Daniel and Nassrin against Ms Seco, Mr Tarrant and TFC in misleading and deceptive conduct that they made representations to Daniel, in his own capacity and as agent for Nassrin, in support of the Recommendations. These are defined as the "Daniel and Nassrin Representations" and are different to the Ken and K Bricks Representations. It is alleged that in reliance on the representations made to them, Daniel and Nassrin invested in substantially the same Agribusiness Investments as Ken and K Bricks and also took out loans from the same two financiers. 16By her defence Ms Seco puts all of the allegations against her in issue and raises a number of special defences. 17It will be apparent from this summary that there is substantial overlap in the case brought against Ms Seco by Ken and K Bricks. This extends from the background circumstances it is alleged Ms Seco knew or ought to have known to the Ken and K Bricks Representations themselves as well as, given the way the case is pleaded, the question of reliance, because it is Ken's state of mind that will be relevant to both his own case and that of K Bricks. Even the relevant Agribusiness Investments are (with one exception) the same, as are the lenders. The only difference is the size of the investments and the amount of the loans. In addition, Ms Seco faces a case brought against her by Daniel and Nassrin based on different representations but leading to investing in the same Agribusiness Investments and borrowing from the same lenders. 18It is therefore clear from the Claim itself that much of the defence costs Ms Seco will incur will have to be incurred in any event, irrespective of whether K Bricks was a party, including that part of the Claim in which Ken's claim is based on the same facts, matters and circumstances as K Bricks' claim. It is for this reason that Ms Seco's ability to prove to the Court what her costs would be that were solely referable to K Bricks' claim against her assume central importance in determining the present application.

The statutory provisions 19Ms Seco relies on s 1335(1) of the Corporations Act 2001 (Cth) (the "Act"): (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. 20She also relies on Rule 42.21(1)(d) and (1A) of the Uniform Civil Procedure Rules 2005 (NSW) (the "UCPR"): (1) If, in any proceedings, it appears to the court on the application of a 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, or ... (1A) In determining whether it is appropriate to make an order that a plaintiff referred to in subrule (1) give security for costs, the court may have regard to the following matters and such other matters as it considers relevant: (a) the prospects of success or merits of the proceedings, (b) the genuineness of the proceedings, (c) the impecuniosity of the plaintiff, (d) whether the plaintiff's impecuniosity is attributable to the defendant's conduct, (e) whether the plaintiff is effectively in the position of a defendant, (f) whether an order for security for costs would stifle the proceedings, (g) whether the proceedings involves a matter of public importance, (h) whether there has been an admission or payment in court, (i) whether delay by the plaintiff in commencing the proceedings has prejudiced the defendant, (j) the costs of the proceedings, (k) whether the security sought is proportionate to the importance and complexity of the subject matter in dispute, (l) the timing of the application for security for costs, (m) whether an order for costs made against the plaintiff would be enforceable within Australia, (n) the ease and convenience or otherwise of enforcing a New South Wales court judgment or order in the country of a non-resident plaintiff. 21The parties accepted (correctly) that nothing turns on such distinctions as there may be between the language of the two provisions. It was common ground that in order to enliven the jurisdiction to grant security, the Court had to be satisfied that "there is reason to believe that the plaintiff will be unable to pay the costs of the defendant". Furthermore, it was accepted that if the jurisdiction was enlivened, two further steps had to follow: first, whether in the exercise of the Court's discretion an order should be made and, second, if so, the quantum and terms of any such order.

Jurisdiction 22For many years courts have approached applications of this kind by reference to the exposition of Von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205: In my opinion the power of the court under s 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security. 23However, in Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377 ("Livingspring"), Maxwell P and Buchanan JA said of Von Doussa J's exposition: 13 This formulation has been applied many times. In our respectful view, however, it is wrong to substitute a judicial exposition for the words of the statute itself. As the High Court has stated repeatedly in recent years, it is the words of the statute which govern. Kirby J made the point very clearly in Central Bayside General Practice Association Limited v Commissioner of State Revenue: Where the law in issue is expressed in the form of an Act of an Australian legislature, it is in the words of that statute that the content of the legal obligation is to be found, not in judicial synonyms, restatements or approximations. 14 The language of the statutory test is clear. The court must address the question which the section poses: Is there reason to believe that the corporation will be unable to pay the defendant's costs? There is no warrant for - and no apparent advantage in - adopting the much lengthier Beach Petroleum formulation, which requires the court to decide whether there is: reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay, ... even if in other events which can be fairly described as reasonably possible the plaintiff corporation would be able to pay... 15 The phrase 'reason to believe' is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more. The wording adopted may be contrasted with other familiar formulations such as "if the court is satisfied that" or "if in the view of the court it is likely that". The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a "real risk".) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs. 16 It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation's impecuniosity. The provision equips the court with the means to require that the defendant be secured against that risk. 24In HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87, Ward JA was considering an application for the security for costs of an appeal. Her Honour said: 7. In Livingspring, in the Court of Appeal in Victoria, it was suggested that, in fact, the test is less demanding than has otherwise been thought, on the basis that the Beach Petroleum formulation requires the Court to decide whether there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay, and the Court in Livingspring considered that it may be sufficient simply for there to be a possibility that the company would be unable to pay. At [15] it was said: The phrase 'reason to believe' is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more. The wording adopted may be contrasted with other familiar formulations such as 'If the court is satisfied that ... ' or 'If in the view of the court it is likely that ...'. The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a "real risk".) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs. 8. Reference was also made to what was said by Merkel J in Meni's Tailoring and Alterations Pty Ltd v Jeanswest Corporation Pty Ltd [2003] FCA 1108 as to the undemanding nature of the test. Security was there ordered even though the applicant company had a significant business in the sense of turnover and staff. There the applicant company was a two dollar paid up capital company that did not have substantial fixed or liquid assets. 9. Similarly in Hurworth Nominees Pty Ltd v ANZ Banking Group [2005] NSWSC 1360 White J applied the test in Beach Petroleum, and referred to it as an undemanding test. His Honour there looked at the evidence of available assets of the plaintiffs, noting there that legal representation by the plaintiffs for the proceedings in question would "eat into" the plaintiff's available assets and therefore the likely consumption of some of those assets in paying for legal representation in the proceedings. 25With the utmost respect to Von Doussa J, the approach taken by the Victorian Court of Appeal is plainly correct, in particular with its emphasis on applying the actual words of the statute and its counsel that "a practical, common sense approach" must be taken for the examination of the corporation's affairs. I propose to approach this application by identifying the issue at the jurisdictional stage of the inquiry as being whether the Court is satisfied on the balance of probabilities that there is reason to believe that K Bricks will be unable to pay Ms Seco's costs if it is ordered to do so. 26Having said that, and consistently with the basic injunction to apply the words of the applicable statute without reference to any judicial gloss, I must respectfully record my hesitation insofar as the analyses to which I have just referred go on to speak of the test as being "undemanding" or "less demanding" either by reference to Von Doussa J's exposition or as a freestanding proposition. I have difficulty in ascribing content to such language in the context of the application of the relevant provisions and, beyond making the observation, the passages to which I have been referred in the authorities do not go on to explain what it means. 27One source of my hesitation is that the nature or content of the "reason to believe" must be informed by the other words in the relevant section. I note, in particular, that both the Act and the UCPR go on to speak of reason to believe that the plaintiff will rather than, for example, may be unable to pay the defendant's costs. Viewed in that way, describing the test as "undemanding" may be seen to be inapt and potentially misleading. 28Nevertheless, it cannot be denied that eminent and experienced judges have made observations to the effect of the test being "undemanding", "less demanding" or to a "low threshold". There is a nice question, not debated before me, as to whether those judicial observations have been made in circumstances which are binding upon me. For present purposes I will assume, without deciding, that I am so bound. The content which I consider should be assigned to such expressions is what flows from the application of s 140(2) of the Evidence Act 1995: 140 Civil proceedings: standard of proof (1) In a civil proceeding, the court must find the case of a party proved if it is satisfied that the case has been proved on the balance of probabilities. (2) Without limiting the matters that the court may take into account in deciding whether it is so satisfied, it is to take into account: (a) the nature of the cause of action or defence; and (b) the nature of the subject-matter of the proceeding; and (c) the gravity of the matters alleged. 29The existence of "reason to believe" is itself an inference of fact, to be drawn from other proven facts, and to be established on the balance of probabilities. Translated into the context of an application for security for costs, the considerations set out in s 140(2)(a) and (b) require that, in determining whether it is satisfied of the existence of the reason to believe, appropriate weight should be given to what their Honours in Livingspring referred to (at [166]) as "the policy of the provision, which is to protect the defendant against the risk of the plaintiff corporation's impecuniosity".

The costs of the defendant 30The first step to engage the Court's jurisdiction to order security for costs against a corporate plaintiff is for the defendant to prove on the balance of probabilities the amount of the defendant's costs which it says the plaintiff may be ordered to pay. The reason for this is obvious. There may be no reason to believe that a defendant will be unable to pay $50,000 and every reason to believe it will be unable to pay $500,000. As Emmett J (as his Honour then was) observed in Save the Ridge Inc v Commonwealth of Australia [2004] FCA 1289 at [24], "It is necessary for a court to have evidence from an experienced practitioner as to the costs that are likely to be incurred and as to the amount of those costs that are likely to be allowed on taxation". In this case there is a real question as to what Ms Seco has proven in this regard. The answer requires a close examination of the evidence.

Ms Seco's evidence 31Ms Seco relied on the evidence of her solicitor, Mr Christopher Nicholls. There is no doubt that Mr Nicholls is suitably qualified and experienced to give expert evidence as to the costs likely to be both incurred and allowed in commercial litigation in this Court. 32Mr Nicholls' first affidavit was sworn on 17 July 2013. His affidavit contained a schedule identifying the various tasks to be undertaken in the conduct of the litigation with estimates as to the time required for each task to be performed by a solicitor or counsel (or both), and their hourly rate. He properly set out in his affidavit the assumptions upon which the schedule was based, including making it clear that his estimate was based on "the estimated solicitor and counsel time (including senior counsel) that is likely to be incurred by the Third Defendant in defending the proceedings". In other words, his estimate was for Ms Seco's costs in defending all of the claims brought against her by the five plaintiffs. Mr Nicholls' affidavit concluded by advancing a figure for Ms Seco's costs of $287,142.90, being the total arrived at in the schedule (a solicitor/client figure) reduced by 40% to reflect the figure which, in Mr Nicholls' experience, was likely to be allowed after assessment. 33Mr Nicholls' next affidavit was sworn on 28 November 2013, only a few days before the hearing of Ms Seco's Amended Notice of Motion. It was still an estimate of Ms Seco's likely costs of defending the claims brought against her by all five plaintiffs. The affidavit indicated, by reference to the schedule attached to his earlier affidavit, that whereas the original estimate for the first five items in that schedule was $21,500, accounts had been rendered reflecting the numerous disputes between the parties which had occurred since the swearing of the earlier affidavit, such that the amount in respect of those items was in fact $181,500. Adopting that figure, plus what remained applicable from his earlier estimate and again applying a 40% reduction for assessment, Mr Nicholls' estimate of Ms Seco's likely legal costs became $383,142.60. 34The hearing commenced before me on 4 December 2013. Mr D.R. Campbell of Senior Counsel, appearing with Mr A.C. Harding of Counsel for the plaintiffs, took objection to the relevant parts of Mr Nicholls' two affidavits. Because of the importance the adequacy of Ms Seco's evidence has now assumed, it is necessary to set out the course of the argument by reference to the transcript (T9:29- T12.25): CAMPBELL: The objection is that the schedule and the methodology by which Mr Nicholls compiles the schedule is irrelevant to the application because it relates to the plaintiffs collectively. It does not relate to the plaintiffs the subject of this application. Of course it was prepared at a time when the application was being brought against all plaintiffs. HIS HONOUR: Yes. CAMPBELL: I make the same objection with respect to the affidavit of 28 November when we get to it because he has elevated or increased the costings in that affidavit from the one I am just talking about and he adopts the same methodology. MARTIN: Your Honour, the fact that the application is made solely against the fifth plaintiff does not, in our submission, affect the admissibility of this evidence. This evidence is simply evidence of the costs that the third defendant is estimated it will have to meet in the future in relation to the totality of the claim being brought by the plaintiffs. We accept that. That is all the evidence goes to. It obviously, and as a matter of admissibility we would submit clearly admissible in relation to the totality of the costs. Obviously what is going to be required to be done and it is not unusual that there then be a discounting factor brought to account by reason of the fact that you have three other claims by individuals being brought together with the claim being made by the corporate plaintiff. An assessment will have to be made as to what proportion of the costs should be attributed to the claim being maintained by the fifth plaintiff, the corporate plaintiff, against the defendants. Leave that question aside. It still does not adversely affect or render inadmissible the evidence of Mr Nicholls as to the totality of the costs that the third defendant will be required to or estimated will be required to meet in the future in relation to the claim being propounded against her. HIS HONOUR: Yes. What troubles me, Mr Martin, is that I note in your submissions where you deal with the question about what do you do with multiple plaintiffs where you are quite careful it seems to me prima facie perfectly correct to say yes we don't look at the causes of action as between the plaintiffs and the fifth defendant that I don't actually have any evidence, it would appear, where somebody has turned their mind to what are the costs that are really going to be referable to the case between the fifth plaintiff and the third defendant. ... MARTIN: That is going to be an assessment that will need to be made your Honour and I will need to take your Honour to authority that deals with the question that the calculation or estimate of costs on a security for costs application is not a precise process. There are elements of estimating what those costs are going to be and a broad brush approach is the approach that should be taken by the Court. HIS HONOUR: I have no difficulty with that as a proposition of law. Even as between a single plaintiff and a single defendant the authorities make it clear that it is not a taxing exercise, it is a broad brush approach. The difficulty which you will need to deal with and assist me with is that on top of the broad brush you are adding a layer of impression which may become imprecision in terms of saying out of that I am going to have to discern a percentage that might reflect the costs as between the plaintiff, the relevant plaintiffs and the third defendant. MARTIN: That is so your Honour, but coming back to the objection HIS HONOUR: It does not make it irrelevant, I accept that Mr Martin. I admit the affidavit CAMPBELL: Except it uses the wrong question your Honour. That is the problem. We are being asked to deal with the application on evidence directed to a question that is not the question that your Honour should be asked to look into. That is HIS HONOUR: Mr Martin has indicated the way he proposed to approach it. My immediate reaction is it is not a very satisfactory way to proceed but it is a way that on the authorities seems to me to be open to him. Have you asked to crossexamine Mr Nicholls? CAMPBELL: We have. HIS HONOUR: Well CAMPBELL: Your Honour, it really does not and should not fall at our feet to try and crystallise out of their broad brush and gloss analysis what is some kind of appropriate synthesis of the true question that should have been put before the Court because we are here responding to this application. We are not trying to construct it. Now, it also bears on the question because if there is no evidence of relevant quantum then how can your Honour make what is the critical threshold determination of whether this plaintiff has the capacity, if so ordered at the end of the proceedings, to meet whatever costs order it could be required to meet because we don't even know what that exposure is or may be. What is the figure your Honour uses, as it were, to say 'Well if you have got more in the bank than that you are okay, if you have less you are not'. HIS HONOUR: That may be the real problem for Mr Martin. CAMPBELL: That is why I object to the reading of the affidavit. They may have no evidence and I may need to adduce nothing your Honour. HIS HONOUR: It seems to me that the difficulty with dealing with it at this stage in the way you propose that under s 55 "relevant evidence" is evidence that if it were accepted could rationally affect directly or indirectly the assessment of the probability of the existence of a fact in issue in the proceedings. Now, a fact in issue is the costs between the particular parties but the total quantum, it seems to me, must be evidence which could rationally affect the assessment of the existence of the more precise figure so on that basis, Mr Campbell, I will admit it but I have put Mr Martin on notice that it seems to me he does have a real problem. CAMPBELL: Can I just add one thing. Without more, it cannot then become relevant to the question which is posed, and I would ask that that evidence be limited as to its use at this point to the matter that he has put forward, namely, his evidence of the totality of the costs that the third defendant says it will incur in relation to the matter but is not evidence of the costs of the third defendant in relation to defending its action that has been brought by the fifth plaintiff because it just cannot be with respect without more. HIS HONOUR: Mr Martin, what do you say as to that, that I make an order limiting the application of the evidence? MARTIN: There is no basis for so limiting the evidence, your Honour. The evidence is simply evidence of what the totality of the costs will be that my client may incur, estimate may incur in relation to the plaintiff's case that is being propounded against it. That is what the evidence goes to. As to what inferences or what can be done with that evidence, that is going to be a matter ultimately for submissions. It may be a matter that Mr Nicholls can give evidence about since he is going to be required to be crossexamined. HIS HONOUR: Mr Martin, I accept that submission. I am not going to limit it. The fact is it is only evidence of the totality of the costs of the whole proceedings and I will signal now that I think it is singularly unsatisfactory from the Court's point of view that I am going to [be] asked to pluck a number where you have properly in other parts of your submissions drawn to attention the fact that one should focus only on the case as brought and the representations sued upon as between the plaintiff and the third defendant. That is a matter for submission. I won't limit the evidence but the evidence is what it is evidence of and I understand it to be evidence of the totality of the costs estimated to be incurred. 35A similar objection was taken on behalf of K Bricks to Mr Nicholls' affidavit of 28 November 2013. The Court admitted the affidavit on the same basis as it admitted the 17 July 2013 affidavit, namely that it was relevant "but it may suffer from the same problem as it relates to the whole of the costs of the proceedings" (T13:6-9). 36On 5 December 2013 the proceedings were adjourned to 19 December 2013. On 18 December 2013 Mr Nicholls swore a further affidavit in which he sought to express an opinion as to Ms Seco's costs in defending only the claim brought against her by K Bricks. His evidence was: 3. On 29 November 2013, at the last hearing of this application, the question was raised as to the quantum of security that should be provided by K Bricks Pty Ltd, the fifth plaintiff. 4. On 17 July 2013 I provided an affidavit in which I set out in table format the estimated costs that would be incurred by the third defendant should this matter proceed to a final hearing. The estimate was updated in my affidavit dated 28 November 2013 when actual costs were available from accounts rendered for work previously estimated. 5. The investments made by K Bricks Pty Ltd are the largest proportion of the claim and the allegations made against the third defendant concern conversations and representations alleged to have been made by the third defendant to Ken Tugrul as the authorised representative of the fifth plaintiff. 6. In this respect I refer to the affidavit evidence of Ken Tugrul sworn 21 April 2010 and in particular paragraphs 48 to 110 dealing primarily with the investments made by K Bricks Pty Ltd. A copy of the affidavit is annexed to this affidavit as Annexure "A". 7. In my opinion only minor reductions would be applicable to the estimates previously provided. A reduction in the estimates previously provided would directly relate to time involved with evidence of the other plaintiffs. These reductions would amount to a reduction primarily in the amount of days of the hearing and preparing cross examination. 37Paragraphs 5 and 7 of Mr Nicholls' affidavit of 18 December 2013 were objected to because it was submitted that those paragraphs failed to disclose the reasoning upon which Mr Nicholls' opinion was based. Given the interlocutory nature of the application and the fact that Mr Nicholls had been required for cross-examination, those paragraphs were allowed. After making such adjustments as he considered necessary, Mr Nicholls' evidence was ultimately that Ms Seco's costs of defending the claims made by K Bricks up to the date of the conclusion of the hearing would be $370,974 and sought an order for security in that amount. 38In the course of his cross-examination, Mr Nicholls accepted that his estimate of the costs reflected the question which he had understood that he was required to address: if K Bricks was the sole plaintiff suing Ms Seco, how long would the proceedings take and what would be the costs incurred by her? He also accepted that that was not the same as asking the question on the assumption that there were five plaintiffs and what costs would Ms Seco incur that were solely referable and peculiar to K Bricks' claim and would not have to be dealt with in the context of the claims of the other four plaintiffs.

The parties' submissions 39In the course of final submissions Mr Campbell SC, for K Bricks, raised what he submitted was "a pivotal antecedent question to the usual question in applications of this type". He submitted that in order to determine whether there was reason to believe that K Bricks would be unable to pay any costs it might be ordered to pay, it was necessary to know what those costs would be. There were some issues in the proceedings where there was an overlap at least in the case brought by K Bricks and Ken, based upon the same representations made to Ken in his capacity as both an individual and as a director of K Bricks. There were other aspects of the proceedings where there was a discrete claim being brought by other plaintiffs concerning other conversations with Ms Seco and representations made directly by her to them. 40It was submitted that Mr Nicholls' calculations in his earlier affidavits were of no assistance because they concerned Ms Seco's costs of the entire claim being brought against her by all of the plaintiffs. Mr Nicholls' final affidavit did not cure the problem because it addressed the wrong question, namely Ms Seco's costs of defending K Bricks' claim on a stand alone basis and ignoring costs that would in any event be incurred referable to the other claims in the proceedings. Finally, it was put that Ms Seco had been on notice of the evidentiary problem from the outset of the hearing and had failed to deal with it. It was not, Mr Campbell SC submitted, for the Court to speculate as to what costs Ms Seco would incur referable to K Bricks' claim alone, but rather it was for Ms Seco to lead what he described as "credible, reliable, informative evidence" on the topic. 41Mr Martin SC, for Ms Seco, responded to K Bricks' submissions by drawing my attention to the approach adopted by Forrest J in Quadrant Constructions Pty Ltd v Morgan Smith Barney Aus Pty Ltd [2009] VSC 455 at 54-56: 54 In determining the amount for security of costs, I adopt what was said by Habersberger J in Saint-Gobain RF Pty Ltd v Maax Spa Corporation Pty Ltd: "I turn then to an assessment of what amount of security should be ordered at this stage. In calculating an amount to be ordered for security for costs the Court does not set out to give the applicant a complete and certain indemnity for costs. The amount ordered to be provided is, after all, only an estimate of the probable costs which the applicant will incur as far as they can be ascertained. Uncertainties, such as the possibility that the proceeding may settle, have also to be taken into account by way of a discount." 55 The only relevant evidence is that of Mr Andrews. He estimates the costs up until the conclusion of the preparation for trial as being between $62,500 to $73,500. He makes no allowance for the costs associated with pleadings and limits the costs of witness statements to two lay witnesses and no expert witnesses. His estimate of counsels' fees also seem to me to be somewhat conservative. . 56 In my view, in determining an application such as this, it is necessary to look at costs both in the broad, as well as scrutinizing the individual items - but not to the extent of minute examination. Descending into too much detail does not assist in the conduct of the exercise because by its nature it is necessarily imprecise and requires guesstimates as much as estimates. Rather, a figure has to be allowed, based on Mr Andrews' assessment, with adjustments, which reflects the cost of preparation for litigation in this Court for a trial that will take two weeks. That figure should be assessed on the basis a mediation will take place, but that there will, necessarily, be costs of trial preparation incurred prior to the mediation. 42It was then submitted that the Court could make an assessment by reference to the pleadings as to what proportion of the costs that Ms Seco would incur were solely referable to K Bricks' claim. Mr Nicholls' approach was said to be appropriate, in that he had looked at Ms Seco's overall costs and then discounted by an amount that he thought would be referable to matters unrelated to K Bricks' claim. The Court was not required to make a finding similar to a finding in relation to an objective fact because the authorities envisaged the Court arriving at an estimate of the costs to be incurred in the future. There was evidence that the costs referable to K Bricks' claim alone was approximately $370,000 and there would have to be a discount applied because part of the $370,000 involved an overlapping of costs, being costs that clearly related not only to K Bricks' claim but also the other individual plaintiffs' claims. 43At the conclusion of the hearing the Court gave Ms Seco an opportunity to make a further written submission putting, by reference to the evidence, what figure she submitted the Court should find were the costs that she was likely to incur solely by reference to K Bricks' claim against her. Ms Seco took advantage of that opportunity and it was put on her behalf that the party-party costs referable to K Bricks' claim against her were $295,621.41. This amount was calculated by applying a 30% discount to all of Ms Seco's actual and future party/party costs so as to arrive at her costs referable to K Bricks' claim against her. 44Ms Seco's further written submissions made the point that the Court was required to ensure that "sufficient security" or "such security as the Court thinks fit" should be given and that there was nothing otherwise to limit the amount which might be ordered. Reference was made to the observation of French J (as his Honour then was) in Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 15 FCR 497 at 515 that "the process of estimation embodies to a considerable extent, necessary reliance on the "feel" of the case after considering relevant factors". Several other authorities were referred to for similar dicta. 45Mr Nicholls' evidence was then considered and the submissions continued: 11. Mr Nicholls gave an estimate of the Third Defendant's costs "as they relate to the Fifth Plaintiff" to be $393,002.50: [9] and Schedule A - C.L. Nicholls' affidavit (18.12.13). This amount represented a 17.88% reduction of the total costs of $478,571.50 which were the Third Defendant's likely future costs against all Plaintiffs: Schedule A - C.L. Nicholls' affidavit (18.12.13). 12. The amount of security sought by the Third Defendant for the costs of defending the Fifth Plaintiff's claim up to the conclusion of the hearing was estimated to be $350,974 made up of 60% of $618,291, being the actual cost ($225,289) and the likely future costs of $393,002. 13. It is important to note that no evidence was called by the Fifth Plaintiff contradicting the evidence of Mr Nicholls, and it was always open for the Fifth Plaintiff to do so. 14. The Third Defendant recognises that the actual cost ($225,289) should have been reduced to take into account that some of those costs were incurred in the defence of the claims brought by the individual Plaintiffs, e.g. issuing notices to produce and subpoenas, preparing defences. 15. The Third Defendant also recognises that the 17.88% reduction did not fully reflect the costs that were incurred or would be incurred in the defence of the claims brought by the individual Plaintiffs against her. 16. Acknowledging the "imprecise" and "impressionistic'1'' nature of determining a party's likely costs, it is submitted that the more appropriate reduction to all of the Third Defendant's actual and future costs should be 30% rather than 17.88%. This is more consistent with the uncontradicted evidence of Mr Nicholls. The 30% reduction should be applied not only to future costs but also to the actual costs incurred by the Defendant. 17. Accordingly, the amount of the Third Defendant's party/party costs referable to the Fifth Plaintiff's claim against her is $295,621.41. This amount is calculated by adding the actual cost ($225,289) with the future costs ($478,571.50), arriving at a total figure of $703,860.50. This amount should be reduced by 30% (other individual Plaintiffs' claims) ($211,158.15), giving a figure of $492,702.35. This amount should be further reduced by 40% (party/party assessment) ($197,080.94) arriving at the final amount of $295,621.41. 46Before turning to K Bricks' response, one matter needs to be recorded in relation to paragraph 17 of Ms Seco's submissions. The proposed addition of the actual cost ($225,289) with the future costs ($478,571.50) itself appears to involve an element of double counting. Mr Nicholls' estimate of future costs of $478,571.50 is derived from his affidavit of 17 July 2013 and therefore predates some of the costs which in that affidavit were only estimates becoming actual costs. Those actual costs were referred to in Mr Nicholls' affidavit of 28 November 2013, which made it clear that they supplanted some of the elements which had been included in the original future costs estimate. Because of the conclusion which I have reached, the extent of any double counting (which may or may not be great) does not need to be investigated further. 47K Bricks' written submissions in response argued that the power to award security for costs had to be exercised judicially. Although estimates of future costs were necessarily imprecise and impressionistic, there had to be a proper evidentiary basis on which to make the assessment. The Court could not simply "clutch the figure out of the air". K Bricks' key submissions were: 7. Mr Nicholls frankly conceded in cross-examination that in making his estimates he had made no attempt to exclude the costs of the proceedings that were referable to the claims made against the Third Plaintiff by the four natural person plaintiffs. 8. Accordingly, his statements of past costs and estimates of future costs were prepared on a misconceived premise, are overstated (as the Third Defendant accepts: DCOQ [15], [15]) and offer no practical or any relevant guidance to the Court in assessing the amount of past costs and likely amount future costs which are referable to the claims brought by the Fifth Plaintiff. 9. In the absence of evidence, the Court is left to speculate as to the relevant amount. The attempt by the Third Defendant to fill the evidentiary void by postulating a discount of 30% on Mr Nicholls' past and future cost figures should be rejected. This figure has been 'clutched out of the 'air; it is unsupported by any process of reasoning or by any evidence. It is therefore entirely arbitrary, for it is no more logical to suggest a discount of 30 per cent as it is to suggest a discount of 50 per cent, or 60 per cent, or 85 per cent. 48Finally, K Bricks submitted that it was significant that while in the course of argument Ms Seco had submitted that the Court should examine the pleadings to make an estimate of what proportion of Ms Seco's total costs might be referable to K Bricks' claim alone, her own further written submissions had made no attempt to undertake such an analysis. 49Ms Seco's written submissions in reply again drew attention to the fact that Mr Nicholls' estimate was supported by his conclusion that K Bricks' claim was the "largest portion of the claim", and that "only minor reductions" would be required from the total figure, resulting primarily in a reduction of the number of the days of the hearing and in the preparation of cross-examination. The submissions then sought to support the proposed 30% reduction as being "consistent" with Mr Nicholls' acknowledgment that the actual costs incurred as at 18 December 2013 did include costs incurred by Ms Seco referable to claims brought by the other plaintiffs. It was finally submitted that "in light of the uncontradicted evidence of Mr Nicholls, 30% is not an unreasonable amount by which the amount of the actual and future party/party costs of the third defendant is to be reduced".

Consideration 50For the following reasons I accept K Bricks' submission that the evidence advanced on behalf of Ms Seco does not permit the Court to find on any rational or verifiable basis what costs Ms Seco is likely to incur solely referable to K Bricks' claim. 51The Court cannot determine the jurisdictional issue in a security for costs application without first making a finding on the balance of probabilities as to the amount of costs the defendant is likely to incur. The onus of proving that figure is on the defendant applicant for security. Without that figure the Court cannot go on to consider whether there is a risk of non-payment of those costs. 52The basic error in Ms Seco's submission that the Court's task was impressionistic and not to be undertaken as though the matter was an assessment or taxation is that it addressed the wrong part of the inquiry. The citations from the authorities referred to in paragraphs [41] and [44] above were all from that point in the respective judgments when the court was looking at the position after the jurisdictional question had been answered affirmatively and the court had moved on to consider the quantum of security to be ordered. There is no doubt that, while starting from the amount which the defendant applicant has proven to be her likely costs, at that second stage of the inquiry a number of other considerations will affect the Court's exercise of its discretion to determine the amount of security to be ordered. The main reason for this is that the purpose of an order for security is not to provide a complete indemnity to the defendant for her likely costs. Those considerations can include the strength of the plaintiff's case and any defence, the prospects of a matter settling and the extent to which there may be an overlap between issues raised by a corporate plaintiff and other plaintiffs against whom the defendant would not be entitled to an order for security. 53Like any discretion vested in the Court, the discretion to order security for costs must be exercised judicially, i.e. rationally and for the purpose for which it was conferred. The starting point for the rational exercise of a judicial discretion must be the evidence. The point is even more obvious in an application for security where what is required is "a rational basis for the belief" as to risk of non-payment (see paragraph [23] above). 54Once Ms Seco abandoned her application against the four natural plaintiffs, she bore the burden of adducing evidence upon which the Court could determine the amount of costs she was likely to incur referable solely to K Bricks' claim against her. This is because both the power to award security in its terms and the principled exercise of the discretion compel the result that in the case of overlapping claims, an order for security should not extend to providing security for costs which will nevertheless be incurred in dealing with claims brought by those from whom the defendant is not entitled to security. In other words, a defendant is not entitled indirectly to the benefit of an order for security for costs which she could not obtain directly. 55Considering Mr Nicholls' evidence in the light of the previous paragraph, his evidence was directed to the wrong question. The parties (correctly) agreed that there was commonality between Ken's personal claim against Ms Seco and K Bricks' claim against her. It is also obvious from a perusal of the Claim that while issues of reliance and causation may vary between Ken and K Bricks on the one hand and Daniel and Nassrin on the other, there is a commonality between Ken and K Bricks on those matters. There is also much common background in the relationship between all of the plaintiffs and Ms Seco. In those circumstances, the question is not what were Ms Seco's likely costs on the basis that she was the only defendant and K Bricks was the only plaintiff. Rather, the question had to be what were the incremental or additional costs Ms Seco was likely to incur over and above those she would incur in defending the other plaintiffs' claims, especially Ken's. 56A simple way of demonstrating the difficulty with Mr Nicholls' approach is his evidence in relation to the length of the hearing. He originally estimated that the hearing of all issues would require 15 days. In his final affidavit he said 13 days would be required for the hearing of the case as between K Bricks and Ms Seco on a stand alone basis. However, even the most cursory examination of the Claim demonstrates that a hearing of the issues between Ms Seco and the other plaintiffs will take far more than two days. It may be that this point also demonstrates that Mr Nicholls' original estimate of 15 days for the final hearing was an underestimate. 57Mr Nicholls' evidence is therefore of no assistance to the Court. It was submitted for Ms Seco that whatever the status of Mr Nicholls' evidence, the question of Ms Seco's likely costs was really one for the Court to determine by reviewing the pleadings. I do not accept this submission. K Bricks' criticism of Ms Seco's failure even to attempt such an analysis in her final written submissions is well made. 58The defendant applicant, through her lawyers, knows far more about the likely dimensions of a case and the costs that will be incurred. The defendant applicant bears the onus of proving what her likely costs will be. The Court will have little or no idea from the pleadings how much time particular issues will take up both in preparation and then at the hearing itself. Similarly, the plaintiff through its lawyers, will be in the best position through its knowledge of the case to challenge, to the extent necessary, the assumptions underlying the defendant applicant's assessment of the costs she is likely to incur. In undertaking the kind of exercise that was required in this case, the pleadings are no more than the essential starting point of the analysis. 59I have set out a summary of the Claim in paragraphs [13] to [17] above. In testing Ms Seco's submissions I have reviewed the Claim and Ms Seco's defence. From these documents I have formed the impression that, if it is the correct approach, a discount of only 30% is quite insufficient. Putting it the other way around, the issues unique to K Bricks' claim do not appear to be anything like 70% of the issues in the proceedings. However, in the absence of proper evidence tested by cross-examination, any assessment I might make would be speculative and risk visiting an injustice on one side or the other. 60Moving on from the pleadings, considerations of both principle and fairness prevent acceptance of the approach advocated in Ms Seco's further written submissions. Those submissions take the unusual course of accepting that parts of Mr Nicholls' assessment were inadequate and then proffering a new discount, as it were from the bar table. No particular reasoning is offered for the new discount figure. There is considerable force in K Bricks' retort that the figure could have been 50%, 60% or 85%. Evidence which has fallen short cannot be supplanted by submission. 61From the point of view of fairness, the amount of any applicable discount should also be the subject of evidence so it can be tested by cross-examination. It would be quite unfair to K Bricks now to accept Ms Seco's new discount figures put in submissions after the conclusion of the hearing, in circumstances where it cannot be tested by K Bricks. In saying this I am not to be taken as even accepting that in the present case an impressionistic discounting from the total costs to be incurred is the correct, or even a persuasive, way of establishing what Ms Seco's additional or incremental costs solely referable to K Bricks' claim will be.

Conclusion 62I have reached this decision with considerable hesitation, mindful that it determines Ms Seco's application at the threshold. The hearing ran for six days and many other issues were the subject of detailed evidence and debate, including exhaustive evidence and cross-examination about K Bricks' financial position. 63That financial evidence itself demonstrated the importance of the Court being able to determine on the evidence the amount of costs Ms Seco was likely to incur solely referable to K Bricks' claim. Ms Seco's expert accounting evidence focused on whether K Bricks could meet a costs order of $280,000. The evidence disclosed that K Bricks was a genuine business with substantial turnover that had a demonstrated ability to meet liabilities incurred in the ordinary course of business of the order of $280,000. Whether it could meet such a debt over and above its trading liabilities was another question. 64However, given that it was in the construction industry, the evidence also made clear that K Bricks was heavily cash flow dependent and had few assets. Ms Seco's evidence had also raised significant issues about the reliability of K Bricks' accounts. In those circumstances, being able to arrive with confidence (at least on the balance of probabilities) at a figure for Ms Seco's likely costs solely referable to K Bricks' claim was especially important. For example, I have little doubt on the evidence that K Bricks could meet a costs order for $100,000. A finding that Ms Seco's likely costs were higher than that figure, perhaps significantly higher, would have engaged different and additional considerations as to the existence of reason to believe that a costs order for such a higher amount would not be met. 65This is an unusual case. Generally in such applications the defendant applicant's likely costs are proven by that party's solicitor, who is necessarily familiar with the matter, or an appropriately instructed costs consultant. There is often no cross-examination permitted on such evidence or, if it is, it is generally kept under some constraint. This is because of the interlocutory nature of a security for costs application and the fact that a degree of informed estimation and the application of experience in determining the defendant's likely costs is accepted by the Court as a necessary part of the evidence usually tendered on the question. The task is not an assessment or taxation in advance. 66What sets this application apart is that the landscape changed from a relatively straightforward assessment of Ms Seco's likely costs of defending the entirety of the proceedings to an assessment of the costs solely referable to K Bricks' claim against her. Ms Seco's evidence did not sufficiently engage with the consequences of that change for what she had to prove. 67Mindful of the nature of this application, I have approached the matter as generously as I consider possible in Ms Seco's favour in reviewing her evidence and the submissions advanced on her behalf. This included attempting the general assessment by reference to the pleadings which she urged upon the Court. Notwithstanding that, I have come to the firm conclusion that the evidence does not permit the Court to reach a rational and evidence based (as opposed to speculative) conclusion as to what costs Ms Seco is likely to incur solely referable to K Bricks' claim against her. Ms Seco's Amended Notice of Motion will be dismissed. Subject to any further submissions, costs should follow the event.

Postscript 68Shortly before the time I was proposing to deliver this judgment this morning, junior counsel for the plaintiffs properly drew to my attention the decision of Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 delivered three days ago. I have reviewed that judgment, by which I am, of course, bound. As it happens there is nothing in the Court of Appeal's reasons that requires me to change the views I have expressed above. On the contrary, that decision affirms the necessity to apply the relevant test under the Act and the UCPR without judicial gloss, focusing attention upon the existence of "reason to believe" that a party "will be" unable to meet any adverse costs order. Furthermore, the decision confirms that while the respondent to a security for costs application may bear an evidentiary burden to raise particular issues, the legal burden of proof to establish all the elements of entitlement to an order for security (including, in the circumstances of this case, the amount of costs likely to be incurred by the applicant) remains "from first to last" upon the applicant for security.

Amendments 20 March 2014 - In line two, "Ken" changed to "the plaintiffs" Amended paragraphs: 68 - Postscript 24 March 2014 - Amend counsel for defendants and add solicitors for second and fourth defendants Amended paragraphs: Cover page - representation 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: 24 March 2014

Australian Securities and Investment Commission Act 2001(Cth)

Corporations Act 2001(Cth)r 42.21(1)(d)

At a glance

Court

Decision date

Before

Source

Judgment (12 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (12)

Cited By (5)