In these proceedings, the plaintiff builder, Macquarie Grove Homes Pty Ltd (Macquarie Grove), claims to be entitled to additional remuneration on a quantum meruit basis in respect of work undertaken between 2014 and 2016 to construct five houses for the defendant developer, Gammage Investments Pty Limited (Gammage).
Before me for hearing are two notices of motion filed by Gammage. The first notice of motion seeks security for Gammage's costs of the proceedings. The second notice of motion seeks the production of 26 categories of documents by way of discovery or pursuant to a subpoena issued to Mr Aaron Ferguson, the sole director of Macquarie Grove.
The debate at the hearing focused on the security for costs motion which I deal with first.
[2]
Gammage's application for security
By letter dated 19 February 2020 (received on 12 March 2020), Gammage foreshadowed to Macquarie Grove that it considered it had a basis to make a security for costs application and requested Macquarie Grove to provide certain material in relation to its financial position.
On 24 March 2020, Macquarie Grove responded to Gammage's letter. It refused to provide any of the financial documents requested and disputed there was any basis for the request.
On 7 October 2020, Gammage filed its notice of motion seeking security for costs in the sum of $160,277.79 or such other amount as the Court considers appropriate pursuant to r 42.21(1) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), s 1335 of the Corporations Act 2001 (Cth) (Corporations Act) and the inherent jurisdiction of the Court.
Gammage's motion for security is supported by an affidavit of William Ellicott, Gammage's solicitor in the proceedings, sworn 7 October 2020. Mr Ellicott's affidavit includes the calculation of costs and disbursements, including counsel fees, in support of the order sought.
Macquarie Grove opposes the relief sought and relies on an affidavit of Aaron Ferguson, Macquarie Grove's sole director, secretary and shareholder, affirmed 30 October 2020 and an affidavit of Scott Mort, Macquarie Grove's solicitor in the proceedings, affirmed 29 October 2020.
Mr Ferguson's affidavit and the documents exhibited to Mr Ellicott's affidavit provide evidence relating to Macquarie Grove's operations and financial circumstances relevant to Gammage's application for security. That evidence can be summarised as follows:
1. Macquarie Grove was registered in March 1998, at which time its name was MDAF Constructions Pty Limited;
2. Macquarie Grove's paid-up share capital is $402,200;
3. Macquarie Grove has no real property registered in its name;
4. Macquarie Grove has 19 interests registered in the Personal Property Securities Register (PPSR). Two of the interests relate to a NAB loan facility with a maximum limit of $300,000 and a current liability of $281,676.34 that requires Macquarie Grove to make monthly payments to NAB of $7,105.04. One of the interests is in respect of a trading account which has a maximum limit of $20,000 with nil outstanding. The other interests relate to trade accounts with other suppliers as part of the suppliers' standard terms of trade and only apply to the value of the supplies in respect of which they are secured;
5. as at 30 September 2020, Macquarie Grove had cash in the bank of $147,323.26. The bank statements in evidence suggest that, over the last three months, Macquarie Grove has had net revenue of around $5,800 per month;
6. most of Macquarie Grove's assets are in the form of equipment, vehicles and other construction-related tools and supplies; and
7. Macquarie Grove has a range of current and upcoming building projects. It estimates that it will receive payments in respect of its current projects of around $1.540 million and around $6.325 million in respect of upcoming projects.
[3]
Threshold question
The threshold question raised by Gammage's application, which is in dispute, is whether there is credible evidence that establishes there is reason to believe that Macquarie Grove will be unable to pay Gammage's costs if ordered to do so: UCPR, r 42.21(1)(d); Corporations Act, s 1335.
Gammage must demonstrate a rational basis for the belief that Macquarie Grove will be unable to pay its costs. It is not sufficient to merely demonstrate a risk that Macquarie Grove will be unable to do so: Precise Training Pty Ltd v Chief Commissioner of State Revenue [2020] NSWSC 1202 at [51]; Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at [16].
Gammage submits that the evidence indicates that Macquarie Grove does not currently have the financial ability to meet an adverse costs order. Gammage points to Macquarie Grove's existing liabilities as evidenced by the PPSR charges; the amount of Gammage's legal costs that Macquarie Grove will have to pay if it is not successful; Macquarie Grove's available cash assets and current net revenues; and the estimated future legal costs that Macquarie Grove will incur.
Gammage also relies on Macquarie Grove's failure to provide the documents requested that related to its financial position. Gammage submits that this a significant factor, referring to the comments of Robb J in Re Beechworth Land Estates Pty Ltd (Admin Apptd) (2015) 298 FLR 233; [2015] NSWSC 733, who observed at [115]:
There is a point where, in the face of some evidence that casts doubt on the financial capacity of a plaintiff company, a point-blank refusal to provide adequate internal documentary evidence of the financial capacity of the company, will justify a finding that the necessary reason to believe exists.
Macquarie Grove disputes that the evidence adduced by Gammage is sufficient for the Court to conclude that Macquarie Grove will be unable to meet an order for Gammage's legal costs. It relies on its paid-up share capital, trading history, cash in the bank and anticipated cash flow from its current and future projects.
Macquarie Grove also contends that the charges on the PPSR are not indicative of any financial stress and are simply an ordinary incident of trading. While I agree with the submission that PPSR registrations may not necessarily indicate that a company is in financial difficulty at a general level, I note that the registrations in this case identify a current liability to NAB that exceeds the amount of available cash that Macquarie Grove has in the bank.
Macquarie Grove is an established building company and has a number of current and future projects of some value. But the evidence on this application does not identify the anticipated profit from those projects or when the estimated cash payments are expected to be received. Mr Ferguson's evidence that the expected cash payments will ensure Macquarie Grove's future capacity to satisfy a negative costs order is also of a general nature and lacks supporting material.
Mr Ferguson's evidence also fails to deal with other matters relating to Macquarie Grove's financial position, such as Macquarie Grove's overall asset and liability position, which could have been expected to be addressed by him in response to the evidence relied on by Gammage. Macquarie Grove chose not to produce any financial records in response to what could be described as a not unreasonable request for documents relating to its financial position having regard to the information that was publicly accessible, and produced some bank statements only after Gammage's motion was filed. As was recognised by Robb J, a party who adopts such an approach risks a finding that the necessary reason to believe may exist.
I do not accept that Macquarie Grove's paid-up share capital of just over $400,000 is a good indicator of its true financial position. That capital may have become an asset of the company but it may have been utilised as part of the company's day to day operations and there is no evidence that it remains available as a liquid asset that could satisfy a future adverse costs order. It is also to be viewed in the context of Macquarie Grove's known liabilities, as established by the evidence, which includes the NAB PPSR interest of around $281,000.
Macquarie Grove currently has cash at hand of around $147,000. The company search in evidence also indicates that Macquarie Grove has a higher than average credit risk rating, with only one past payment default and no insolvency notices, and has traded as a builder for some time. However, in my view, those matters are not sufficient to outweigh the overall picture painted by the evidence on this application.
To my mind, the picture painted by the evidence is that Macquarie Grove does not have sufficient available liquid assets or ongoing net revenues to cover its current existing liability to NAB of $281,000, the legal costs it will have to pay if Gammage succeeds, which are estimated to be around $160,000 on a party/party basis, and the future legal costs it will incur for its own case, which are estimated to be between $44,000 to $71,500 (exclusive of GST) on a solicitor/client basis.
The threshold question on which Gammage bears the onus has been described as an undemanding test and a low threshold. It is a test that requires the Court to adopt a common-sense approach to the examination of Macquarie Grove's financial affairs: Wollongong Coal Limited v Gujarat NRE Properties Pty Ltd [2019] NSWSC 187 (Wollongong Coal) at [19] and the cases there cited.
Having regard to these principles, in my view, Gammage has established by the evidence that there is reason to believe Macquarie Grove will be unable to pay Gammage's legal costs if it is successful in the proceedings.
[4]
Discretionary factors
As Gammage has discharged its onus and established that there is reason to believe that Macquarie Grove will be unable to meet a costs order, the evidentiary onus shifts to Macquarie Grove to establish why, as a matter of discretion, security should not be granted: Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245 at [30].
The factors relevant as to the exercise of the Court's discretion are set out in UCPR, r 42.21(1A).
There is no dispute that Macquarie Grove's claim is bona fide and arguable. The debate at the hearing was whether Gammage's delay in bringing the application should disentitle it from obtaining an order for security for costs.
In assessing whether delay is of the kind that would tell against making an order for security, the Court will have regard to the length of the delay, the reasons for it and what has taken place in the interim. The further a plaintiff has proceeded in an action and the greater the costs it has incurred without steps being taken to apply for an order for security, the more difficult it will be to persuade the Court that such an order is not unfair or oppressive: Li v State of New South Wales [2013] NSWCA 165 at [37] and [39].
I accept Macquarie Grove's submission that there has been delay on Gammage's part in bringing its application for security for costs. The application was brought nearly 12 months after the proceedings were commenced, seven months after the issue of security was first raised in correspondence, and at a time when all of the lay evidence and most of the expert evidence had been served.
As I said during oral submissions, it is expected that applications in the Technology and Construction List will be brought on promptly. Relevantly, no explanation for the delay has been proffered by Gammage.
On the other hand, Macquarie Grove has been on notice of the prospect of the application for some time. No evidence been led to suggest that the proceedings will be stultified or that the costs that Macquarie Grove has incurred to date will be wasted if security was to be ordered at this stage of the proceedings.
In those circumstances, my view is that Gammage's delay in bringing the application is not sufficient to disentitle it from seeking security entirely, as Macquarie Grove submitted. Rather, the unexplained delay is a factor that warrants security not extending to the past costs incurred in the proceedings: Re Colorado Products Pty Limited (in provisional liquidation) [2013] NSWSC 611 at [69]; Chocron v Onkoud [2018] NSWSC 1205 at [10].
As no other discretionary factors were raised by Macquarie Grove, the conclusion I have come to is that security for costs should be ordered although limited to Gammage's future legal costs only.
[5]
Quantum of security
Mr Ellicott estimates that Gammage's future solicitor/client costs will be $92,786 to $97,031 (exclusive of GST).
Mr Ellicott's estimate is calculated by reference to six categories of work that I will not detail in these reasons. The categories are referred to at [32] of Mr Ellicott's affidavit and are set out in an aide memoire handed up in Court. Mr Ellicott estimates the future solicitor costs by reference to an hourly rate for him to undertake the work, counsel's fees by reference to a daily rate for senior counsel briefed in the matter, and expert's fees by reference to a quantity surveyor expert. Mr Ellicott proposes a discount factor of 30% based on a party-party recovery, which results in an estimate for Gammage's future legal costs on an ordinary basis of around $65,000 to $68,000 (exclusive of GST).
Macquarie Grove submits that Gammage's estimate for its future costs is excessive. It relies on Mr Mort's affidavit which estimates Macquarie Grove's future solicitor/client costs to be around $44,000 to $71,500 (exclusive of GST). It says that Gammage's claim for costs of $13,500 to $18,000 for the category relating to counsel fees to proceed to trial is high having regard to the work covered, namely, reviewing expert evidence in reply and the briefs on the applications currently before the Court. It also submits that a 40% discount factor should be applied based on Mr Ellicott's evidence that, in his experience, at a minimum, his client would likely recover somewhere between 60% to 70% of its costs.
In my view, some of the criticisms made by Macquarie Grove have merit. Gammage's estimate is based on rates for senior counsel, whereas junior counsel appeared at the hearing of these applications. Gammage's estimated costs are high in comparison to the quantum of Macquarie Grove's costs and there has also been a significant increase in the amount Gammage seeks by way of security since the application was foreshadowed earlier this year.
The Court is entitled to take a broad brush approach to quantum and there is no principle that entitles Gammage to be given security for the whole of its recoverable costs: CBX2 Pty Limited v National Australia Bank (No 2) [2015] NSWSC 1969 at [54], [55]; Wollongong Coal at [68]. In exercising its discretion to order security for costs, the Court will stand back from the amounts claimed and the precise assessment of costs, consider the case on its particular facts and seek to make an order that is just and reasonable in the circumstances: Wollongong City Council v FPM Constructions Pty Limited [2004] NSWSC 523 at [50].
Applying these principles to this case and taking into account the evidence of the estimated costs, I have come to the view that it is appropriate to order security in the sum of $55,000 (exclusive of GST). That amount discounts Mr Ellicott's estimated costs for the category relating to counsel fees to proceed to trial and assumes a 60% recovery rate. It also takes into account that security need not be a complete protection for Gammage's costs but should provide some measure that is not illusory and not be oppressive to Macquarie Grove by reason of Gammage's delay in making the application for security.
[6]
Costs of Gammage's application for security
As for the costs of the application, Gammage submits that they should follow the event. Macquarie Grove submits that costs should be costs in the cause.
Having regard to the final outcome on this application, I accept Macquarie Grove's submission and will order that the costs of the security motion be costs in the cause. While security for costs will be ordered, it will be in a sum that is significantly less than the amount sought by Gammage, reflecting what I would describe as its mixed success on the motion. Such an order also reflects the 'default' costs order in rule 42.7(1) of the UCPR for interlocutory applications.
[7]
Gammage's application for discovery
I turn next to Gammage's discovery motion, also filed on 7 October 2020.
During argument on the discovery motion, I expressed my view that some of the categories sought documents that were not relevant and, as currently drafted, some categories were too broadly drafted. These views were taken on board by counsel and during the luncheon adjournment, Gammage revised its categories, with the result that the parties resolved most of the issues between them. The resolution of those issues included refining the orders sought so that Gammage has leave to issue a subpoena to Mr Ferguson in relation to two categories of documents, rather than requiring him to produce documents responsive to five categories as identified in the motion.
Two categories of documents remained in dispute. I ruled on those categories during the course of argument for reasons that are recorded on the transcript.
The only issue that remains for determination is what costs order should be made.
Macquarie Grove seeks an order that Gammage pay its costs of compliance with the discovery order in the amount of $5,000. This amount was put forward in oral submissions by Macquarie Grove's counsel based on the estimate given by Mr Ferguson in his affidavit that he anticipated the costs to respond to the discovery motion would be $10,000.
I am not persuaded by Macquarie Grove's submission that it is appropriate to make that order. I am not satisfied that the estimate of $5,000 given by counsel at the hearing has a sound evidentiary basis or that the discovery is sufficiently extensive to warrant making such an order.
While accepting that there will be some burden and costs to Macquarie Grove in complying with the discovery order, the scope of the disclosure required has reduced significantly compared to the disclosure sought at the time of Mr Ferguson's affidavit. The initial request was for 26 categories of documents to be disclosed; now there are only 10 categories to be discovered, most of which are narrow in scope.
Mr Ferguson's affidavit does not identify whether his $10,000 estimate related to the legal costs Macquarie Grove would incur in compliance with discovery, as distinct from costs that he considered his business would incur. Nor does it identify whether his estimate included the legal costs of compliance with the foreshadowed subpoena, which costs may be the subject of a separate order in due course.
Accordingly, I have come to the view that the appropriate order is as sought by Gammage, namely that the costs relating to the discovery motion, which will include the costs of compliance, should be costs in the cause.
[8]
Orders
For these reasons, I make the following orders:
1. In relation to the Defendant's notice of motion filed 7 October 2020 seeking security for costs, pursuant to rule 42.21(1)(d) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) and/or section 1335(1) of the Corporations Act 2001 (Cth), the Plaintiff to provide security for the Defendant's costs in the amount of $55,000 by 30 December 2020.
2. The security required by Order (1) to be provided by way of payment of funds into Court or the provision of a bank guarantee drawn by a reputable financial institution in favour of the Defendant, which bank guarantee is to be held by the Principal Registrar of the Supreme Court of New South Wales.
3. The proceedings are to be stayed if security is not provided in accordance with Orders (1) and (2) above.
4. The costs of the Defendant's notice of motion for security for costs filed on 7 October 2020 be costs in the cause.
5. In relation to the Defendant's notice of motion filed on 7 October 2020 seeking discovery, on or before 15 January 2021, the Plaintiff to serve on the Defendant, in accordance with r 21.3 of the UCPR, a verified list of the documents in its possession, custody or control which fall within the following categories:
1. a copy of all bank statements for accounts held in the name of the Plaintiff from the period 1 May 2014 to 31 March 2017;
2. a copy of all monthly statements relating to the Defendant as a debtor of the Plaintiff in relation to the properties the subject of these proceedings for the period 1 May 2014 to 24 October 2019;
3. a copy of any and all records of payment (including receipts) made by the Defendant to the Plaintiff in relation to properties subject of these proceedings from 1 May 2014 to 31 March 2017;
4. a copy of all records of communications, including emails, letters, SMS messages, social media messages, file notes and records of meetings, between the Plaintiff and the Defendant for the period 1 February 2014 to 30 September 2017 in relation to any monies owed or payments made by the Defendant to the Plaintiff;
5. the documents used to prepare the calculation referred to in paragraph 10(b) of the affidavit of Aaron Douglas Ferguson's affidavit affirmed on 14 July 2020;
6. the documents used to prepare the calculations embodied in:
1. invoices 746 - 750;
2. the amended invoice of 22 September 2017; and
3. the letter from Bradbury Legal dated 27 July 2018.
1. the documents briefed to Mr McBeth, including those identified in [1.5] of his reports;
2. the documents used by Mr McBeth to prepare his reports, including the source data identified in [2.2] and the "internal Altus rates" [2.4];
3. the documents used to prepare the declared contract sums summarised at [7.18] of Mr Madden's report; and
4. all documents evidencing or recording calculations made from time to time by the Plaintiff on the cost of constructing the properties which are subject matters of these proceedings.
1. The Plaintiff make the documents referred to in Order (5), other than privileged documents available for inspection on or before 22 January 2021.
2. Grant leave to issue a subpoena to Aaron Douglas Ferguson seeking production of the following documents:
1. a copy of any and all bank statements for all accounts held in the name of Aaron Douglas Ferguson for the period 1 May 2014 to 31 March 2017, including accounts held jointly with another person or entity; and
2. a copy of all communications, including emails, letters, SMS messages, social media messages, file notes or records of meetings or communications between Aaron Douglas Ferguson and the Defendant (including its officers, employees, agents, and contractors) for the period 1 February 2014 to 30 September 2017 in relation to any monies owed or paid by the Defendant to the Plaintiff.
1. The costs of the Defendant's notice of motion for discovery filed on 7 October 2020, including the costs of compliance, be costs in the cause.
2. List the proceedings in the Technology and Construction List for directions at 12 noon on 5 February 2021.
[9]
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Decision last updated: 09 December 2020