Kupang Resources Ltd (subject to Deed Of Company Arrangement) v Elias

Quantum of Mr Sage's Recoverable Costs

1. The proceedings concern investments which the company made indirectly in certain manganese mining tenements in Indonesia. The investments were made in 2012 and 2013. The total amount invested was $12 million. I say that the investments were indirect because the form of investment involved the acquisition of shares in companies which in turn owned or had interests in the tenements. The investments also involved entry into joint venture agreements with other parties. Mr Sage is a former director of the company and was one of the directors in office when the investments were made.
2. The Statement of Claim alleges, and this appears not to be in dispute, that Mr Sage first became involved when the company entered into what was described as an alliance agreement with Cape Lambert Resources Limited (Cape Lambert), a company of which Mr Sage was and remains the executive chairman. The first defendant in the proceedings, Chaiben Paul Elias, is also a director of the company; and the third defendant Paul Kelly was a director of the company up until the end of January 2013. The fourth defendant Pippa Coppin was the company secretary of the company from March 2012 to the end of December 2013. The fifth and sixth defendants, Brian Robert Taylor and Philip Joannou, are chartered accountants and, it is said, acted as auditors of the company up until November 2012.
3. The plaintiff's case against Mr Sage in the proceedings is that he failed to exercise a reasonable degree of care and diligence in connection with the investments which are the subject of the proceedings. Amongst other things, it is alleged that no or insufficient due diligence was undertaken on the proposed investments and specifically that no independent advice was obtained from an expert geologist. It is also alleged that proper financial projections were not prepared nor was a proper assessment undertaken of the sovereign risk associated with the investments.
4. Similar allegations are made against Mr Elias and Mr Kelly. It is alleged that Ms Coppin herself considered that it was appropriate for a due diligence to be undertaken and did not take sufficient steps to ensure that this happened or, at least, was properly considered by the members of the board. The case against the fifth and sixth defendants is that they failed to exercise a proper degree of care and diligence in auditing the company's 2012 annual accounts. It appears that the company still owns the interests in the tenements. The allegation is that their true value was much less than what the company paid for those interests.
5. The proceedings were commenced in April 2018 and the Statement of Claim was filed at the beginning of June. I was informed from the Bar Table that all but one of the defendants has filed a defence and that an affidavit has been filed from the Deed Administrator exhibiting the documents upon which the company relies. It is clear that expert evidence will be required and the plaintiff's expert evidence has not yet been filed, nor have the defendants yet been directed to file their lay evidence.
6. The present application was made by Interlocutory Process filed on 27 September but no point is taken about any delay in bringing the application and I proceed on the basis that the amount of the security should be calculated by reference to costs already incurred by Mr Sage as well as estimated future costs.
7. Mr Sage's application is supported by an estimate of costs provided by Martin Lawrence Bennett, who is a senior Western Australian legal practitioner acting for Mr Sage in these and related proceedings. Mr Bennett is a very experienced practitioner and has conducted over 570 trials and other contested hearings since admission to practice in 1982.
8. The evidence establishes that Mr Sage's costs to date are $60,000. Mr Bennett has estimated his future costs at $557,000. This estimate is broken down into seven categories, representing different aspects of the conduct of the proceedings starting with interlocutory applications, directions and so forth. The figure of $430,000 claimed represents seventy per cent of the total of the actual costs and Mr Bennett's estimate.
9. In opposition to the application, an affidavit was filed by Amanda Kim Banton, who is the plaintiff's solicitor. Ms Banton too is a very experienced practitioner who practises primarily in this State. She has provided her own estimates of future costs corresponding to the categories elected by Mr Bennett. Her figure for Mr Sage's future costs is $233,000. Ms Banton suggests that this $233,000 figure should be discounted by thirty-five per cent, yielding a figure of $152,000.
10. Ms Banton does not address the reasonableness of the costs incurred so far. Counsel submitted that these also were too high and suggested a figure of $10,000. Thus the total conceded by the plaintiff (but subject to the set-off point, which I will address below), is $162,000.
11. Two themes emerged from the submissions made by counsel for the plaintiff on this point. The first was that Mr Bennett's estimates involved an unnecessary level of expense from involvement of solicitors in preparing the case. In this regard counsel referred me to the decision of Rares J in Armstrong Scalisi Holdings Pty Ltd v Piscopo (Trustee), Re Collins [2017] FCA 423. In that case, his Honour was considering an application for security for costs and drew attention to the fact that in the estimates the amounts for counsel's fees were significantly less than the costs of the associated solicitor's fees and, in some cases, involved as many as four solicitors being involved in the same task as counsel. His Honour said (at [23]-[24]): [23] I am not intending to direct criticism in these reasons towards the particular solicitor, Mr Russell. That is because I am not suggesting that this is an isolated situation. To the contrary, it appears to have become a more general model for solicitors to do work that the purpose of having a separate bar was originally intended to ensure be done by the specialised and most cost - efficient advocate, namely counsel. All too often, in looking at security for costs applications, the amounts estimated to be incurred by solicitors in preparing cases, as opposed to the amounts estimated to be incurred by counsel, involve a skewing of work towards the solicitors' efforts that does not seem to be efficient or appropriate in the preparation or presentation of the particular case. Where counsel has to make the forensic decisions as to how the material facts should be pleaded, what pleadings are maintainable, what evidence is to be led and what submissions should be drafted, it is of vital importance that counsel undertake the burden of doing that work themselves and not have it duplicated unnecessarily by the involvement in preparing drafts of one, let alone multiple, solicitors. [24] Moreover, if solicitors do the significant amounts of drafting work involved in the estimates, it becomes much more difficult for counsel to delete or jettison that material, if counsel decides that some, or often much, of it is irrelevant or unnecessary. After all, by then the solicitor's client has been charged for what is very often forensically useless and would never have been included in the drafting process, had that process been in the control of the advocate from the beginning, as used to be the position.
12. Counsel for the plaintiff in this application suggested that Mr Bennett's estimates involved some of the same features. I do not disagree in any way with the observations made by Rares J; indeed I think they have some application to the present circumstances. But I think regard must also be paid to the fact that Mr Bennett, as a Western Australian practitioner, operates within a legal profession where there is no formal division between counsel and solicitors.
13. As I understand it, Mr Bennett does not propose to brief senior counsel to lead junior counsel who appeared before me on this application. This is a complicated, multi-party commercial litigation of the type where the retainer of senior counsel would undoubtedly be justified. I expect that Mr Bennett as a senior and experienced litigator would work closely with counsel in the case and, in these circumstances, I do not think that Mr Bennett should be criticised if he were to work on the case virtually full-time. Because of Mr Bennett's level of experience in conducting trials, the observations made by Rares J appear to me not to be directed towards a practitioner in Mr Bennett's position. In fact, I was informed from the Bar Table that it was not counsel who had drafted Mr Sage's defence in this case.
14. Having said that, the estimates prepared by Mr Bennett include substantial amounts of time in preparation and at the hearing itself for the attendance not only of counsel and Mr Bennett but also a senior associate and a more junior solicitor from Mr Bennett's firm. Because of the rates which are proposed to be charged, the costs of those additional practitioners represent a substantial proportion of the estimate. If in this case senior and junior counsel had been retained, then in my view a junior solicitor would be appropriate to instruct them in court. But considering Mr Bennett as equivalent to senior counsel, I still question the need for a further senior associate to be involved. Similar observations apply to other categories of Mr Bennett's estimate.
15. The other theme to the submissions by counsel for the plaintiff was the uncertainty in determining the tasks needed to prepare the case for hearing. For instance, Mr Bennett has estimated that there will be five interlocutory applications but none of these are identified. On the other hand, Ms Banton has allowed for one interlocutory application. The truth is that there might be none or there might be five and, at this early stage of the case, it is really impossible to say.
16. Counsel for the plaintiff submitted that there needed to be some discount for contingencies (for instance, the possibility of settlement) and that the Court in fixing an amount of security does not aim to cover fully the costs which it is claimed might be incurred. Counsel referred in particular to the statement of Griffiths LJ in Procon (GB) Ltd v Provincial Building Co Ltd [1984] 2 All ER 368 as follows (at 379): In the normal course of things, it is to be expected that the court will, to some extent, discount the figure it is asked to award. Allowance will have to be made for the unquenchable fire of human optimism and the likelihood that the figure of taxed costs put forward would not emerge unscathed after taxation.
17. The Court must of course fix any amount of security for the defendants' costs by reference to what would normally be recovered on taxation or assessment. Security is awarded to cover the risk to a successful defendant of being left out of pocket. That risk is properly measured by reference to recoverable costs, not costs incurred.
18. But if counsel was intending to submit that the Court should make a further discount to reflect uncertainties in the level of costs which would be incurred and hence be recoverable, then I cannot agree. The Court can only do its best with the material it is provided and the precise level of costs cannot be known but, in my view, the Court should do its best to ensure that the amount of security represents the best estimate of the defendant's recoverable costs in the event that the defendant is successful in the proceedings.
19. In my view, the difficulties created by uncertainty (whether they may result in costs which prove to be higher or lower than can be estimated at present) are best dealt with by the Court tailoring its orders by providing for security to be furnished in tranches and also by affording both parties the opportunity, as the case goes on, to have the amount of security adjusted so as to reflect the actual level of expenditure and the more precise estimates that may be possible as the case proceeds.
20. Where, as in this case, the plaintiff is funded by a litigation funder, the funder may wish to know at the earliest stage how much in total the security will be. But, by the same token, where the figure can be adjusted to reflect developments in the course of the proceedings, the funder has the advantage that the amount may be reduced if costs turn out not to be as extensive as was initially thought.
21. In the present case counsel for the plaintiff indicated that his client was quite happy with the possibility of adjustment of the security amounts as the case continues, provided that the amounts could be adjusted downwards as well as upwards and that appropriate information was provided about the level of costs being incurred by Mr Sage so that the plaintiff can make its own application if the circumstances justify it. Both of these qualifications are reasonable and were accepted by counsel for Mr Sage.
22. Accordingly, I propose to provide for the security to be provided in two tranches. The first tranche will be provided now and will cover costs incurred so far and estimated costs up to the period that the proceedings are fixed for hearing. The second will be payable in advance of the trial. I will also grant liberty to the parties to apply at the point the proceedings are fixed for trial for variation of the amount of the second tranche so as to reflect any variation between the amount of the first tranche and the costs incurred to that point, or any variation between the second tranche and the costs of the hearing as then estimated. I will also direct that an affidavit be filed on behalf of Mr Sage when the matter is fixed for hearing, setting out the costs incurred to that point and the then estimate of Mr Sage's costs of the trial.
23. I have referred to liberty to apply because I wish it to be clear that it will be open to either party to apply for variation simply on the basis of the level of costs and estimates as they then appear, without the necessity of demonstrating that there has been a material change in circumstances. The Court always retains power to adjust a security order, like any other interlocutory order, on the grounds of change of circumstances, and it will be open to either party in the proceedings to make such an application if circumstances relevantly change at any time. But the exercise that I have in mind is in the nature of a review and should not be trammelled by any need to demonstrate that the circumstances have altered in a way that was not foreseeable or was not taken into account at this stage.
24. The effect of this approach will be to create a sort of fail-safe mechanism, which makes the inevitable uncertainty at this point less important in achieving a proper figure for the security ultimately to be provided. On this basis, I propose to deal with the differences between Mr Bennett's and Ms Banton's estimates summarily.
25. Starting with costs incurred so far, there is, as I have stated, no competing figure from Ms Banton. I was not impressed by the figure of $10,000 put forward by counsel for the plaintiff. In a case of this complexity, where the Statement of Claim is more than one hundred paragraphs and given the amounts involved, I do not see the figure for costs so far incurred as being disproportionate. However, the costs to date should exclude any costs associated with the security for costs application, which as a matter of principle must be dealt with separately. There is no separate figure for this and I must also apply a discount to reflect what would be recovered on assessment as opposed to what has been incurred. I propose to allow $35,000 under this head.
26. Mr Bennett's first category of future costs is interlocutory hearings. As I have indicated, his estimate is based on five interlocutory hearings and Ms Banton's on one. Given that no necessary hearing has been identified, I allow Ms Banton's figure of $12,000.
27. The second category is directions hearings. Ms Banton has allowed for two and Mr Bennett for five. The costs associated with each are agreed. I propose to allow for four, which should be $17,000.
28. The third category is discovery and inspection. These proceedings follow examinations which were conducted by the Deed Administrator of the plaintiff into these transactions, among others. Ms Banton suggests that discovery may not be required at all and if so it is unlikely to be extensive. I am inclined to accept that view and I will allow the $21,000 estimated by Ms Banton.
29. The fourth category is for conferences and mediation. This is agreed at $18,000 and so too is the figure for expert witnesses (the seventh category), which is agreed at $35,000.
30. The fifth category is for the preparation of witness evidence in the case. Mr Bennett's figure is $86,000 and Ms Banton's is $10,000. The difference is explained because Mr Sage had a stroke in 2012 and in his examination proceedings said repeatedly that he was unable to recall the transactions which are the subject of the proceedings or at least some of them. Ms Banton suggests that in those circumstances little work will be required to prepare his lay witness statement. I cannot agree. Difficulties in recollection will, in my view, make the preparation of the witness evidence more onerous and more complicated than it would be otherwise. I allow $60,000 under this heading.
31. The sixth and largest category is for the preparation for trial. Mr Bennett's estimate is based on eighteen days total trial and preparation, yielding a figure of $275,000. Ms Banton has estimated a period of preparation and trial of fifteen days and has reached a total figure of $129,000. It is clear that there will be many issues in the proceedings other than those affecting Mr Sage and those who represent him will need to be in court for the whole of the hearing. Given the number of parties and the complexity of the issues and the likelihood that there will be extensive lay evidence and extensive expert evidence, I think that Mr Bennett's eighteen day estimate is preferable. However, I think that should be reduced by excluding the costs of the senior associate who Mr Bennett has allowed for alongside himself and a junior solicitor to instruct counsel. In the result I allow $210,000.
32. The figures I have given for the seven categories of future costs must be discounted to reflect what would ultimately be recovered on assessment.
33. Applying a thirty per cent discount yields $260,000; together with the advance of $35,000 for the costs so far incurred, that leaves $295,000. I therefore propose to order a total sum of $300,000 to be provided by way of security. Seventy per cent of the trial preparation figure is $147,000; accordingly the first tranche will be $150,000 and the second tranche will be a further $150,000.
34. This is all subject to the question of set-off, to which I now turn. As I have mentioned, these proceedings follow public examinations conducted by the Deed Administrator. Those examinations took place pursuant to orders made by the Federal Court. Before the examinations took place, Cape Lambert and Mr Sage made an application for security for their costs of the examination (and associated production of documents). Markovic J refused this application in November 2017: Re Hodgkinson (2017) 15 ABC(NS) 483; [2017] FCA 1342. Her Honour ordered that Cape Lambert and Mr Sage pay the Deed Administrator's costs of the application. No steps have been taken to enforce the order made by Markovic J.
35. After the delivery of the decision, Ms Banton wrote to Mr Bennett (who acted for Cape Lambert and Mr Sage in the application) stating that the costs of the application had been $131,000, but that the Deed Administrator was willing to accept $100,000 in settlement. The costs were made up of $104,000 in solicitor's fees, $17,000 in counsel's fees and $10,000 in disbursements.
36. Counsel for the plaintiff submitted that a reduction should be made in the amount of security to reflect the liability under this costs order. The figure suggested by counsel as appropriate was $90,000. In response, counsel for Mr Sage submitted that the "set-off" was not available. He pointed out that the application for the examination was made by the Deed Administrator personally, not the plaintiff company, and that the costs order made is therefore an order made in favour of the Deed Administrator personally. The contention was that the Deed Administrator is a separate party and therefore, on ordinary principles of set-off, no allowance should be made.
37. In my view, the language of set-off is not appropriate in this case. Set-off only applies where there are in fact two liabilities. Here, the Federal Court order has created one liability, but there is no liability on the plaintiff to pay Mr Sage's costs at this point and there may never be. In my view, the question must be addressed from the point of view of the Court's discretion under Corporations Act 2001 (Cth), s 1335(1), rather than by attempting to apply, in their full technical rigour, doctrines of set-off.
38. In my view, the difference between the parties is of no real relevance from the point of view of the exercise of the Court's discretion. The practical reality is that the costs incurred by the Deed Administrators in meeting the application by Cape Lambert and Mr Sage, come out of the funds in the administration and any costs which are awarded in favour of Mr Sage, will likewise come out of the funds under administration.
39. But while the difference between the Deed Administrator's personal entitlement and the company's potential liability is not important, there is another feature of the Federal Court costs order which is. That order was not made against Mr Sage alone. Mr Sage is jointly and severally liable with Cape Lambert. Cape Lambert is not a party to these proceedings. It would be open to the Deed Administrators to pursue recovery of the costs from Cape Lambert without directly affecting Mr Sage's position at all.
40. I have difficulty in seeing why the proper exercise of the discretion would entitle the Court to reduce the amount properly to be allowed on account of Mr Sage's personal costs, on account of a liability which is not wholly Mr Sage's.
41. I think there is a second difficulty with what counsel for the plaintiff asks me to do. Clearly any "set-off" would only be against the recoverable taxed liability. The Court would inevitably be drawn into making some sort of assessment of the likely assessed figure in the Federal Court. It is undesirable enough to have to make estimates concerning the ultimate assessed amount of costs in these proceedings. I am reluctant to embark on the process of making a further estimate of the costs which would ultimately be taxed in the Federal Court. In this regard I note, in passing, that the level of costs incurred by the Deed Administrators shows a gross disproportion between counsel's fees and the solicitor's fees and on the face of it, would appear to illustrate the very sorts of difficulties to which Rares J referred in Armstrong Scalasi Holdings (above at [13]).
42. The hearing before Markovic J took only one day and was followed by some written submissions. I would require far more explanation than is available on the material before me to be satisfied that, where counsel had charged less than $20,000, that the solicitor's charge of five times that amount was proportionate in terms of value to the client for the work undertaken.
43. In a security application where there have already been interlocutory costs orders, then, at least where those costs orders have not been the subject of an order for immediate assessment, the Court has no alternative but to take them into account in assessing how much will ultimately be recovered by the defendant, if successful, and in fixing the amount of security. That is inevitable because the costs will only be assessed at the end of the case.
44. But it is not inevitable in this instance. So far as I can see, there is nothing to stop the Deed Administrator from proceeding to tax the costs of the Federal Court application. Indeed, I can see no reason why that has not happened. On the face of it, it is in the interests of the creditors, or whoever else is going to benefit from the administration, to recover the amount as quickly as possible.
45. Given the other difficulties to which I have referred, I am not inclined to make any allowance by way of "set-off". I think the proper course is to award an amount which properly reflects the likely recoverable costs by Mr Sage, if he succeeds in these proceedings, leaving it to the Deed Administrators to pursue the quantification and, if necessary, enforcement of the costs order that they have already obtained without complicating the present application any further. I will now hear from the parties on the form of orders and costs. [Counsel addressed on the form of orders and costs]
46. The orders of the Court are:
47. The plaintiff provide security for the second defendant's costs in the following tranches: 1.1. $150,000 to be paid within 28 days; 1.2. A further $150,000 to be paid within 42 days of the court setting the matter down for trial.
48. Order that security be paid by payment into Court or such other form as may be agreed with the Registrar or between the parties.
49. Order that the proceedings be stayed against the second defendant in the event of failure to make any of the payments for security provided for under this order.
50. I direct that within 7 days of the Court setting the matter down for trial the second defendant file and serve an affidavit setting out the costs incurred to date and an estimate of the further costs to be incurred to the completion of the proceedings.
51. Grant liberty to either party within a further 14 days to apply to the Court to vary the amount to be provided in the second tranche of security.
52. The costs of this application be costs in the cause.