Kieren Leslie Welzel & Ors v Stephen Paul Francis

Judgment 1In a judgment I delivered in this matter on 30 May 2011 ( Welzel v Francis [2011] NSWSC 477), I concluded that the first plaintiff, Mr Welzel, should provide additional security in respect of the costs of the defendant, Mr Francis. This judgment is concerned with the amount of that additional security. 2The basis of my earlier judgment was that, shortly before commencing these proceedings, Mr Welzel had taken steps to dispose of assets he owned and income produced from his personal exertion to trusts or companies controlled entirely by his wife, from whom Mr Welzel said he had separated, and that Mr Welzel had failed to disclose the extent of his assets at the time security was originally granted. In particular, the evidence demonstrated that 3 days before Mr Welzel commenced these proceedings, a company known as FIAP Pty Ltd was incorporated with Mrs Welzel as its sole director and that company, as trustee of the 3B Property Trust No. 2, had acquired a property in Buddina for $1 million. That property was the subject of a mortgage to the ANZ Bank of approximately $411,000 as at 30 March 2011. Mr Welzel maintained that he had no interest in that property. However, I concluded for the reasons set out in my earlier judgment (at [25]) that Mr Welzel contributed a substantial proportion of the funds used to buy the Buddina property, although there was no evidence before me of how much those funds were. The evidence also demonstrated that income totalling $119,790.50, which on the face of it appeared to belong to one of the plaintiff companies, had been paid to Welzel Systems Pty Limited, a company originally controlled by Mr and Mrs Welzel, but now controlled by Mrs Welzel alone, and that a substantial proportion of that income had been paid to Mrs Welzel as salary, directors fees and superannuation. 3Following my earlier judgment, Mr Welzel filed a notice of motion seeking to re-open that judgment. The purpose of that application was to permit Mr Welzel to lead evidence concerning the source of funds used to acquire the Buddina property and to establish that, as a result of a prior agreement between him and his wife, those funds belonged to his wife, although they were raised through a mortgage and subsequently the sale of a property that they had owned jointly. That application was abandoned during the course of the hearing. 4Following abandonment of the application to re-open my judgment, Mr Gration, who appeared for Mr Welzel, was content to proceed from the starting point adopted by Mr Spencer, who appeared for Mr Francis. 5Mr Spencer's starting point was that the evidence established that, shortly before these proceedings were commenced, the equity held in the three properties then owned by Mr and Mrs Welzel (referred to in my earlier judgment at [4]) was approximately $900,000. Two of those three properties (one at Kellyville and one at Pelican Waters) were subsequently sold and the property at Buddina was bought. Mr and Mrs Welzel's equity in the Buddina property and another property at Dural (ignoring interposed trusts) is now approximately $700,000. Mr Spencer submitted that, applying what he concedes is a rough approach, the court should conclude that Mr Welzel's net assets were half of the $900,000 before the proceedings were commenced, but they are now half of approximately $700,000 - that is, $350,000. According to Mr Spencer, Mr Welzel should provide additional security of half that amount (that is, $175,000) on the basis that the parties should be at equal risk in relation to the position going forward, which involves dividing the assets available to Mr Welzel so that those assets are equally available to meet the costs that each will incur. According to Mr Spencer, if the result of that order ultimately is that Mr Welzel does not have sufficient resources to bring the court proceedings to a conclusion, that can be dealt with by granting liberty to apply to reduce the amount of security that he has provided. 6Accepting Mr Spencer's starting point, Mr Gration says that no additional security should be ordered. The evidence is that Mr Welzel's expected future legal costs are likely to be between $417,000 to $636,000 payable over the next 12 to (at most) 18 months. Mr Spencer does not take issue with those figures. Mr Welzel owes a debt to his mother of $100,000. Consequently, the net assets attributable to Mr Welzel are $250,000 (that is, half of $700,000 less $100,000). The evidence is that Mr Welzel currently works 3 days per week as a consultant earning approximately $750 to $900 per day. He supports his family, which he would be required to do irrespective of whether he and his wife have separated. Taking these matters into account, it is already marginal whether Mr Welzel will be able to afford to fund the litigation to its conclusion. 7In my earlier judgment, I pointed to a number of principles which I thought were relevant to the question whether additional security should be awarded and, if so, the amount. Two are of particular importance in fixing the amount of additional security. The first of those is that the court should not make an order for security that would stultify the proceedings. The second is that, in fixing the amount of any additional security, the court should aim to fix an amount which reflects the position the parties would have been in if Mr Welzel had not disposed of his assets to avoid having to meet a costs order from them. 8As to the first principle, it was suggested during the course of the hearing that Mrs Welzel would not be prepared to agree to making the Buddina property available as security and consequently any order for security that could only be satisfied in that way would have the effect of stultifying the proceedings. In those circumstances, Mr Welzel made an open offer to provide additional security of $10,000. That offer stated that Mr Welzel would raise that amount through a cash advance on his credit card. The offer also pointed out that Mr Welzel had a costs order in his favour, which was likely to be worth approximately $35,000. Mr Gration submitted that the court should take that fact into account in assessing the reasonableness of the offer. 9Two points can be made about the offer and the assumption underlying it. First, I do not think it is open to Mr Welzel to say that an order which would require Mrs Welzel to agree to security being provided over the Buddina property would have the effect of stultifying the proceedings because Mrs Welzel is not prepared to make the Buddina property available for that purpose. That submission is inconsistent with the submission that Mr Welzel's notional share of assets belonging to Mr and Mrs Welzel are required to meet his own costs. Moreover, as I noted in my earlier judgment, an underlying assumption of an order for security in circumstances such as these is that the person to whom the assets are disposed of would make them available for the purpose of providing security (see [2011] NSWSC 477 at [19]). Unless that assumption is made, the disposal of the assets will be effective to put them out of reach of the person in whose favour a costs order is made. If that assumption proves to be false, then it seems to me that that is a risk that Mr Welzel took at the time he disposed of his assets. If the consequence of that is that the proceedings are stultified, then I think that consequence should be seen as flowing from Mr Welzel's decision to dispose of his assets to a person who is not willing to make them available as security for costs rather than as a consequence of the order for security itself. 10Secondly, I do not think the fact that Mr Welzel has a costs order in his favour is relevant to a determination of the security that he should provide. A costs order in favour of a plaintiff who is ordered to provide security may be relevant to quantification of that security where the amount of security is to be fixed by reference to the anticipated costs of the defendant. Here, however, Mr Francis's costs, on any view, will far exceed the amount of any security that is provided. 11As to the second principle, the question that must be asked is whether, if Mr Welzel had not disposed of his assets, would he have been likely to have had assets available at the time of judgment to meet a costs order against him and, if so, what would the likely amount of those assets have been. It is not possible to engage in any precise calculations in seeking to answer that question. The answer depends on the costs Mr Welzel will incur in the future, changes in the value of the property in which he could have expected to retain an interest and the amount that Mr Welzel is able to earn in the future. None of those matters can be known with any certainty. There are, however, several points which can be made. 12First, it needs to be borne in mind that the difficulty in assessing the position has been brought about by Mr Welzel. It is because he disposed of his assets in order to avoid making those assets available to satisfy any costs order against him that the assessment of security is so difficult. In the context of assessing damages, courts are generally prepared to assess damages in a robust manner and to draw adverse inferences against the wrongdoer where the conduct of the wrongdoer has made the assessment of damages difficult: see Houghton v Immer (No. 155) Pty Ltd (1997) 44 NSWLR 46 at 59 per Handley JA (with whom Mason P and Beazley JA agreed). I do not think that the same principle can apply in an unrestricted way in the present context because, as I have already said, the court should not make an order for security in this case which would deprive Mr Welzel of assets he requires to meet his own legal costs. However, it seems to me that the court can take account of the fact that Mr Welzel has made the assessment of an appropriate amount of security difficult because of the conduct he has engaged in when deciding on an appropriate order. 13Second, and connected to the first point, is the fact that it might be inferred that Mr Welzel expected to have assets worth protecting at the end of the proceedings since otherwise he would not have done what he did. Balanced against this point is the fact that it might be also inferred that the proceedings have turned out to be considerably more expensive than Mr Welzel might have anticipated at the time they were commenced. Moreover, as I pointed out in my earlier judgment (at [21]), Mr Francis must bear at least some of the responsibility for that; and that is a matter that the court should take into account in fixing the amount of any security. Nonetheless, the position is that Mr Welzel disposed of all of his assets and income at around the time he commenced these proceedings. He must have thought that he would still be able to fund the substantial costs of the proceedings he proposed to commence. Although he is currently working 3 days a week and earning $750 to $900 per day, he has in the past earned $24,000 per month from providing consulting services. Consequently, I do not think that it should readily be inferred that Mr Welzel now faces an impossible task of funding the proceedings if he is required to provide any additional security. 14Third, I do not accept Mr Spencer's submission that an appropriate starting point is that Mr Welzel and Mr Francis should bear the risks in relation to costs equally. As I have said, the focus of the court's enquiry should be on the position Mr Francis would have been in if he succeeds in the case and Mr Welzel had not taken the steps that he did to dispose of his assets and income. On the other hand, I accept Mr Spencer's submission that any order for security ought to be subject to liberty to apply. The purpose of that liberty is not to permit Mr Welzel to challenge the order of the court on the basis that Mrs Welzel will not agree to make the Buddina property available for security if that turns out to be the case. Rather, the purpose of the liberty to apply is to cater for the possibility that Mr Welzel's notional interest in the assets now controlled by his wife are required to fund Mr Welzel's own legal costs. 15Fourth, in my opinion, any order for security ought to be relatively modest. It is clear that Mr Welzel has substantial legal costs going forward. He is entitled to fund those costs from any resources available to him. It is only the balance, if any, that should be made available for security. 16Taking these matters into account, I think it is appropriate to order Mr Welzel to provide further security of $50,000. In my opinion, if Mr Welzel had not disposed of his assets, the likelihood is that in one way or another he would have had modest assets remaining out of which a costs order could be satisfied. If that conclusion proves to be false because, in reality, Mr Welzel is required to use all the assets that could reasonably be expected to have been available to him in order to fund his own costs, then that can be dealt with by granting liberty to apply. 17Mr Welzel should have a reasonable length of time in order to provide the additional security. In my opinion, 6 weeks is appropriate. The proceedings should not be stayed in the meantime. 18The parties should bring in short minutes of order to give effect to this judgment. If they cannot agree on the terms of those orders within 14 days, the matter should be re-listed for further argument. 19That leaves the question of costs. Although I have not heard the parties in relation to costs, I am reluctant to set aside further time to deal with the question of costs. An excessive amount of time and costs have already been spent on this application. Mr Francis has been successful in obtaining an order for further security. He has obtained that order because Mr Welzel has taken steps to put assets that he once held outside Mr Francis's reach. Mr Welzel has not been frank with the court in relation to the steps that he took. Time was spent on an application to reopen my earlier judgment. That application was ultimately abandoned. In those circumstances, it seems to me appropriate to award all of the costs of Mr Francis's motion dated 3 March 2011 in his favour. However, if either party seeks a different order, I give that party leave to approach my associate within 14 days of the date of this judgment to re-list the matter for further argument in relation to costs.