Oztech Pty Ltd v Public Trustee of Queensland

Federal Court of Australia|2016-03-17|Before: Mr J, Yates J

By 31 March 2016, the applicant provide security for the respondent's costs up to the commencement of the trial on 27 June 2016 in the amount of $925,265 by way of cash deposit with the Court.
If the applicant does not provide security for costs in accordance with Order 1, the proceeding be stayed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 The respondent applies for orders that the applicant provide further security for his costs of the proceeding. The respondent seeks security in the amount of $1,775,000, representing: "top-up" security for costs from 16 October 2014 to 1 September 2015, in the amount of $775,000; and security for costs from 1 September 2015 to the first day of the trial on 27 June 2015, in the amount of $1 million. 2 The applicant accepts that the respondent has an entitlement to security for costs, specifically in relation to the respondent's future costs. The issues that divide the parties are whether the respondent is entitled, in the circumstances of this case, to the "top-up" security he claims and whether, in any event, the overall amount of the security that the respondent seeks is appropriate.

BACKGROUND 3 This proceeding is a representative proceeding commenced under Pt IVA of the Federal Court of Australia Act 1976 (Cth). It arises out of the respondent's role as the trustee for noteholders in respect of senior unsecured notes issued by the company now called Octaviar Investment Notes Limited (in liquidation) (OIN). A company now called Octaviar Limited (receivers and managers appointed) (in liquidation) (OL) was a guarantor of OIN's obligations under the notes. The applicant alleges that, following a sharp drop in OL's share price in January 2008, and OL's sale of a business (the Stella Group) which was completed on 29 February 2008, the respondent acted too slowly to protect the interests of noteholders, in particular by failing to apply to wind-up OIN and OL, and to take other steps, by 29 February 2008. The alleged consequence is that the respondent breached his statutory, contractual and general law duties to noteholders. 4 The applicant is funded by International Litigation Partners No. 9 Pte. Ltd. (ILP), a litigation funder (described in a company search as an "other investment holding [company]") incorporated in Singapore. There is no evidence that it has assets in Australia. ILP was incorporated on 4 September 2014, just before the commencement of this proceeding. It has issued one ordinary share to Robustus Pte. Ltd., another company incorporated in Singapore. 5 The applicant has already provided security for the respondent's costs. The evidence reveals that this security was provided following periods of extensive negotiation between the parties. 6 On 27 November 2014, the Court made an order that, by 11 December 2014, the parties confer with a view to agreeing on the amount payable by the applicant for security for costs. 7 On 19 December 2014, in the absence of agreement having then been reached, the respondent filed an interlocutory application seeking an order for security for costs in the amount of $2,491,629. However, agreement was eventually reached and, on 16 February 2015, at the request of the parties, the Court made an order by consent that, within 28 days, the applicant provide security for the respondent's costs up to the close of pleadings, in the amount of $200,000. The evidence in the present application shows that, in coming to this agreement, the parties also agreed that, should the respondent make further application for security, then: to the extent that the amount already paid as security exceeded the amount that might be recoverable as party/party costs on a taxation by the respondent, the applicant may seek to have that amount taken into account with respect to any future security payable; and to the extent that the amount already paid as security was less than the amount that might be recoverable as party/party costs on a taxation by the respondent, the respondent may seek to have the shortfall in security taken into account with respect to any future security payable. 8 The Court also granted the respondent liberty to apply for further security for costs. 9 On 25 May 2015, the Court made an order that, by 15 June 2015, the parties confer with a view to agreeing on the form and the amount of further security for costs. The Court also made directions providing for the filing of an interlocutory application seeking further security for costs and for the filing of evidence on that question by both parties, in the event that agreement could not be reached. 10 On 7 July 2015, in the absence of agreement having then been reached, the respondent filed an interlocutory application seeking further security for costs up to a case management conference listed for 1 September 2015, in the amount of $432,474.75. 11 In the course of negotiations, the parties made various offers and counter-offers. The applicant argued that it was entitled to a credit of $57,602 in respect of the security already provided because, in its estimation, $137,302 was the amount of the costs up to the close of pleadings that would be recoverable by the respondent on a taxation. In subsequent negotiations, the applicant continued to press for this credit. On 9 July 2015, in the course of rejecting an offer of security made by the applicant, the respondent's solicitors wrote to the applicant's solicitors, stating: To date, our client has been prepared to negotiate on the basis that he would not seek a "top up" for his recoverable costs of preparing and filing the Defence. If your client continues to press for a credit then our client intends to seek a top up in the amount of his recoverable costs. On a preliminary assessment, our client's recoverable costs up to the filing of the Defence could be as high as $360,000 (being Counsel costs plus 60% of Clayton Utz legal fees incurred in the relevant period). 12 On 10 July 2015, the parties reached an agreement on the amount of the security to be provided and, on 29 July 2015, the Court made an order by consent that the applicant provide further security for the respondent's costs up to the case management conference, in the amount of $249,450, which was to be paid in two instalments. The Court also made an order by consent that the applicant provide additional security ($3,968.50 and $7,000) in the event that certain interlocutory applications were contested. The Court granted the respondent liberty to apply for further security for costs. 13 The applicant has provided security in the total amount of $460,418.50 for the respondent's costs from 16 October 2014 up to 1 September 2015.

The respondent's evidence 14 The respondent's solicitor, Scott William Sharry, has deposed that, from 16 October 2014 to 1 September 2015, the respondent has incurred, and been billed, costs and disbursements, including counsel's fees, of $2,183,341.83 (excluding GST). In his affidavit sworn on 4 December 2015, Mr Sharry has provided a schedule summarising these costs, according to the following identified "phases of work": Initial scoping of Claim and first directions hearing on 27 November 2014; Security Application No. 1; Preparation of Defence; Security Application No. 2; Noteholder Register Issues; Directions Hearing on 25 May 2015 and strategy for conduct of Proceeding; Common Fund Application; Directions Hearing on 29 July 2015; Discovery; Alleged Conflict of Interest; Opt Out and Notice to Group Member Applications; Complaints regarding discovery; Case Management Conference; Application for Further Security; Advice on Evidence and consideration of potential quantum of claim; and General, including matter management and strategy. 15 When the respondent negotiated with the applicant in respect of the quantum of the security to be provided, he was assisted by reports prepared by a legal costs consultant, Ivan Anthony Garrett. These reports were prepared on the basis of assumptions provided by Mr Sharry. Mr Sharry said that, in providing these assumptions, he sought to make a genuine "best estimate" of the work that would likely be required to defend the proceeding. However, Mr Sharry said that the actual work required to be undertaken involved more hours than he had contemplated when making the assumptions. Further, Mr Sharry said that there had also been new and different work that was required to be undertaken which he did not foresee at the time of making his assumptions. Mr Sharry has identified this work. 16 Mr Sharry engaged Mr Garrett to provide a further report giving, if possible, an estimate of the party/party costs likely to be allowed to the respondent on a taxation of costs for the period from 16 October 2014 to 1 September 2015, based on the costs and disbursements actually incurred by the respondent in that period. Mr Sharry's instructions to Mr Garrett were conveyed by letters dated 1 December 2015 and 3 December 2015 and included the schedule to which I have referred. 17 Mr Garrett provided a report on 4 December 2015. This report was revised on 9 February 2016 to take account of certain errors which had been identified. Mr Garrett has expressed the opinion that, taking a broad brush but nevertheless conservative approach, the likely allowable party/party costs for the respondent, for work up to 1 September 2015, would be $1,249,431.16. 18 In preparing his report, Mr Garrett reviewed the schedule that had been provided. He then considered the total number of hours for each category of fee earner that would likely be allowed on taxation having regard to: the description of the general tasks undertaken in the schedule; his instructions (including an instruction to reduce the costs for preparing a defence by 30%); the possibility that some tasks for which costs were incurred would not be allowed at all on a taxation; his knowledge of the matter, including its complexity and the reputational risk to the respondent arising from the proceeding; and his experience. 19 Mr Garrett then arrived at a reduced total number of hours for each category of fee earner that he considered would likely be allowed on a taxation on a party/party basis. It is important to understand that, in arriving at this assessment, Mr Garrett did not review the respondent's solicitors' file. 20 The amount now sought as "top-up" security is the approximate difference between $1,249,431.16 and the total amount of the security already provided by the applicant (see [13] above). 21 It can be seen that Mr Garrett's approach was to allocate, according to the level of fee earner concerned, what he assessed to be the hours of work, at specified rates, that he believed would be recoverable on a party/party taxation. But, apart from his general methodology (see [18]-[19] above), Mr Garrett has not explained how he arrived at this allocation. He has given just a bare, total hourly figure for each level of fee earner. Moreover, Mr Garrett has not identified the tasks covered by each allocation. For example, although Mr Garrett has allocated 910 allowable hours for a fee earner at Partner level, I do not know what work this allocation covers. 22 In this connection, I note that this allocation is far greater than the allocation given for other, more junior levels of fee earner. He has allocated 568 hours for a fee earner (or fee earners) at Senior Associate level; 25 hours for a fee earner (or fee earners) at Special Counsel level; 6.5 hours for a fee earner (or fee earners) at Senior Solicitor level; 130 hours for a fee earner (or fee earners) at Solicitor level; 134 hours for a fee earner (or fee earners) at Law Graduate level; and 388 hours for a fee earner (or fee earners) at Paralegal/LTS Data Analyst level. Once again, I do not know how Mr Garrett arrived at each allocation. 23 However, what I do know is that, in his report provided with respect to future costs (which I will discuss below), Mr Garrett has expressed his belief that, due to the complexity and anticipated documentation involved in this matter, it would be appropriate to assess fees on the basis that fee earners at the levels of a Senior Associate and a Junior Solicitor would conduct the litigation. Mr Garrett also said that it would be appropriate to assess costs on the basis that the Senior Associate and the Junior Solicitor would attend on conferences with both witnesses and counsel. Mr Garrett said that a fee earner at Partner level would be required to undertake certain tasks also undertaken by the Senior Associate and Junior Solicitor, such as perusing pleadings and attending on important conferences with witnesses and counsel. Nevertheless, it is fair to say that Mr Garrett saw the role for a fee earner or fee earners at Partner level to be essentially supervisory of the work undertaken by fee earners at a more junior level. 24 It is difficult to reconcile this approach with Mr Garrett's assessment of the allocations which the respondent says should be used to assess the amount to be provided by way of "top-up" security. The allocations which the respondent advances for "top-up" security plainly have the fee earner or fee earners at Partner level undertaking work that is more than supervisory. 25 What Mr Garrett's report does not provide is an assessment of the reasonableness of the costs incurred by each level of fee earner for the tasks that that fee earner has actually undertaken. It also does not provide an assessment of whether it is appropriate to allow costs incurred at, say, Partner level for work which could properly have been done at a more junior level. 26 The applicant provided the following example to illustrate this particular problem. Mr Sharry has deposed that a fee earner at Partner level has spent 262.9 hours undertaking discovery. Mr Garrett has allowed 910 hours of Partner time in his report, but has not identified the tasks to which the 910 hours have been allocated. It is not clear, therefore, whether Mr Garrett has allowed 262.9 hours of Partner time for discovery or whether he has made reductions from Partner time for that task. The same problem applies in respect of each of the phases of work for which the respondent is seeking "top-up" security.

The applicant's evidence 27 In an affidavit sworn on 28 January 2016, the applicant's solicitor, Amanda Kim Banton, has taken issue with Mr Sharry's identification of the work that he says was new and different work which, at the time of providing his assumptions, he did not foresee. Ms Banton says that a number of these tasks were included in the assumptions and information provided to Mr Garrett and considered by Mr Garrett in his earlier reports, that were used by the respondent in coming to an agreement on the earlier orders for the provision of security. 28 Ms Banton has analysed the schedule in Mr Sharry's affidavit (to which I have referred) and another document prepared by Mr Sharry which provides further explanation of the variances on which the respondent relies for its "top-up" security. In paragraphs 66 to 124 of her affidavit, Ms Banton has undertaken a critique of the work performed for the respondent and of the fees charged for this work. Ms Banton has expressed the opinion that if I came to the view that such further security should be provided, then the amount of $70,413.57 would be reasonable as "top-up" security. 29 I will not seek to summarise all the criticisms and comments made by Ms Banton. It is nevertheless convenient that I refer to some matters that feature in the applicant's submissions: The respondent incurred costs of $111,465.80 in respect of the "initial scoping" of the applicant's claim (the statement of claim was 31 pages in length) and attending a directions hearing on 27 November 2014 by video link, which lasted for three minutes. The respondent incurred costs of $714,654.20 in preparing its defence (the defence is 79 pages in length). This is said to have involved 718.8 hours of Partner time (the equivalent of 102 days at seven hours per day) as well as 189.1 hours of Senior Associate time (the equivalent of 27 days at seven hours per day) on the same tasks, and Counsel's fees of $201,681, as well as the time of other professional staff (at Special Counsel, Lawyer and Graduate Lawyer rates). The respondent claims security for part of these costs ($476,436.14). The respondent incurred costs of $107,542.20 in respect of its first security for costs application (see [5]-[7] above). The respondent incurred costs of $86,293.19 for a directions hearing on 25 May 2015. The directions hearing lasted for approximately 30 minutes. The respondent incurred costs of $133,748.20 in respect of a so-called "common fund" application which was foreshadowed by the applicant, but not proceeded with. The applicant says that such an application, had it been successfully made, really had nothing to do with the respondent in any event because it would have concerned the question of how the cost of the funding provided by ILP was to be shared among group members. The respondent incurred costs of $518,893.85 in respect of the giving of discovery. This work included reviewing approximately 32,000 hardcopy and electronic records held by the respondent. The giving of discovery is said to have involved 1,361.6 hours of work (the equivalent of 194 days at seven hours per day). This included 262.9 hours of Partner time (the equivalent of more than 37 days at seven hours per day); 330 hours of Senior Associate time (the equivalent of more than 47 days at seven hours per day); 117.9 hours of Lawyer time (the equivalent of approximately 17 days at seven hours per day); and 125.3 of Graduate Lawyer time (the equivalent of approximately 18 days at seven hours per day. The respondent incurred costs of $38,597.80 in respect of its second security for costs application (see [9]-[12] above). The respondent incurred costs of $46,327.10 for a directions hearing on 29 July 2015. The directions hearing lasted for approximately 20 minutes. The respondent incurred costs of $267,285.98 in respect of two interlocutory applications the subject of the reasons given in Oztech Pty Ltd v Public Trustee of Queensland [2015] FCA 1010. Apart from Counsels' fees of $149,785, the two applications, which were heard on the one day, were said to have involved 131.6 hours of Partner time (the equivalent of 18.8 days at seven hours per day) and 93.5 hours of Senior Associate time (the equivalent of 13.4 days at seven hours per day). 30 The applicant has engaged a legal costs consultant, Valerie Edith Higinbotham, to review Mr Garrett's report. After noting certain matters in that report, Ms Higinbotham said that, in her view, she could not reconcile Mr Garrett's figures with his instructions from the respondent. Further, she expressed the opinion, without further explanation, that Mr Garrett's calculations did not reflect the likely outcome of a taxation of the respondent's costs. 31 There is a feature of Ms Higinbotham's review which I should note. Ms Higinbotham said that, while it is usual for her to consider what time is likely to be allowed as reasonable on a taxation, in the present matter she has been instructed to assume that the time estimates provided by Ms Banton, in her affidavit, are accurate. Ms Higinbotham said that, accordingly, she has assumed that Ms Banton's time estimates are reasonable. Proceeding on that basis, Ms Higinbotham said that, assuming the time estimates provided by Ms Banton are accurate and that the respondent's solicitors' rates of charges are applied, then Ms Banton's assessment of $70,413.57 for "top-up" security would, on a taxation on a party/party basis, be found to be reasonable.

The respondent's submissions 32 The respondent submits that his approach to seeking "top-up" security, based on Mr Garrett's evidence, represents "orthodox methodology". He argues that, in contrast, the applicant's approach is unorthodox and should be rejected. 33 In this connection, the respondent argues that, while his assessment is based on Mr Garrett's independent evidence, the applicant's approach effectively forsakes the independent exercise of Ms Higinbotham's expertise for Ms Banton's own assessment as the applicant's solicitor. The respondent submits that Ms Banton's evidence, in this regard, is inadmissible. The respondent says that Ms Banton's opinions lack the required expertise on what is likely to be allowed on a taxation of costs. I reject that submission. Having regard to the expertise deposed to in her affidavit, I am satisfied that Ms Banton's evidence, particularly in relation to the work required to be done on specified tasks in litigation of the present kind, is admissible. However, the weight that I should give to Ms Banton's evidence is another matter. 34 The respondent also argues that the applicant has adopted "a too-detailed approach to quantifying security". The respondent criticises the applicant's "line-by-line" approach which, the respondent says, involves a degree of purported precision which is neither necessary nor appropriate for the task at hand. The respondent submits that the task for the Court is not to fix the amount of costs that would be recoverable on a party/party taxation. The respondent says this, even though his approach has been to provide such an estimate. The respondent argues that the Court is called upon to apply a "broad brush" approach to assess the amount of security that is proper in the circumstances. The respondent submits that a liberal approach is warranted in this regard.

The applicant's submissions 35 The applicant submits that the respondent's application for "top-up" security suffers from two vices. First, the applicant says that the parties have already reached agreement on what the appropriate amount of security should be for the tasks for which "top-up" security is sought. Secondly, the applicant says that the respondent has delayed seeking this further security. 36 As to the first matter, the applicant points to the fact that it has already paid security in the amount of $460,418.50. This amount was agreed to by the parties after extensive analysis of each other's claims in that regard and after lengthy negotiations. At the time that agreement was reached to pay the first tranche of security of $200,000 (see [7] above), the respondent had already incurred costs of at least $520,000. The applicant then agreed to pay a further $260,418.50 as security for costs up to 1 September 2015 (see [12] above). At the time that this agreement was reached, the respondent had already incurred costs of $1,714,055.12. The inference is that, at the time that agreement was reached on each occasion, the respondent must have been well aware of the disparity between the level of his actual costs and the level of the amount of security that should be paid. 37 The applicant also refers to the fact that, when negotiating the second tranche of security, the respondent expressed his preparedness to negotiate on the basis that he would not seek "top-up" security while warning the applicant that his attitude might change if the applicant continued to press for a "credit" in respect of the first tranche of security that had been provided: see the passage quoted at [11] above. The applicant submits that, in the face of that representation, it refrained from pressing for a "credit" and entered into the second agreement to pay security. 38 The applicant submits that the Court should not permit the respondent to resile from his earlier agreements by awarding "top-up" security. The way in which the applicant has framed this submission suggests that it advances it on discretionary grounds, rather than as a matter of contractual preclusion. This approach seems to have been followed by Edmonds J in Federal Treasury Enterprise (FKP) Sojuzplodoimport v Spirits International B.V. (No 2) [2012] FCA 23 at [81]-[84] and [113] where "top-up" security was sought after there had been a prior agreement as to the amount of security to be provided. 39 The applicant argues that the respondent's total costs from 16 October 2014 to 1 September 2015 are $2,183,341.83. The applicant says that the amount of $1,714,055.02 should be put to one side immediately, as this represents the total costs incurred when the applicant agreed to provide the second tranche of $260,418.50, bringing the total agreed security to $460,418.50. When this latter amount is put to one side, the only amount "outstanding" is $8,868.31. 40 The applicant submits that if, contrary to its submission, the Court is persuaded that "top-up" security should be given, the amount claimed by the respondent is manifestly excessive. In that connection, the applicant refers to the amounts I have noted at [29] above, and says that costs, in these amounts, and in the amounts claimed for other work, would not be allowable on a party/party taxation.

Consideration 41 I am not persuaded that "top-up" security should be granted other than for certain tasks to which I refer below. 42 The orders for security for costs made in February and July 2015 were the result of negotiated outcomes. Each negotiated outcome was forward-looking, in the sense that the orders for security made in February 2015 were for costs up to the close of pleadings and the orders made in July 2015 were for costs from the close of the pleadings to the case management conference listed for 1 September 2015. On each occasion, the parties advanced competing arguments as to what they considered to be the respondent's likely allowable costs on a party/party taxation for the specifically identified steps in the proceeding. 43 In a letter dated 13 February 2015, the respondent's solicitors identified what they regarded to be the relevant steps to be taken up to the close of pleadings, and summarised the parties' competing positions on the costs for each step. Those steps were identified as: Defence; Particulars (which includes the Reply); Amended Statement of Claim and Defence; and Security for Costs. 44 In a letter dated 10 July 2015, the respondent's solicitors identified what they regarded to be the relevant steps to be taken from the close of pleadings up to the case management hearing appointed for 1 September 2015 and, once again, summarised the parties' competing positions on the costs of each step. Those steps were identified as: Notice to Group Members; Opt Out Notice Application; Security for Costs; Discovery; Case Management Conference; Correspondence; Telephone attendances; and Care and Consideration. 45 I do not understand how, at the time of these negotiations, the respondent could have underestimated his then likely costs for these steps to the extent represented in the present application. Apart from the experience and expertise of his solicitors, he was assisted in formulating his position by Mr Garrett's reports. He also had the competing views advanced by the applicant's solicitors, who were assisted by Ms Higinbotham's reports. Moreover, at the time that negotiations were in progress for the second tranche of security, the respondent must have known that his actual costs for work referable to the first tranche of security were well in excess of the considered view that had been taken in February 2015. At that time, the respondent did not seek "top-up" security for work covered by the first tranche. In the circumstances, the applicant was entitled to proceed on the reasonable expectation that there would be no re-visiting of the question of security in respect of work covered by the first tranche. Furthermore, at that time, the respondent, or at least his solicitors, must have had a fair idea of the level at which costs were running for the tasks that were intended to be covered by the second tranche of security, particularly in relation to discovery. 46 For these reasons, I am not persuaded that, as a matter of discretion, I should go behind the negotiated and agreed outcomes which have been achieved in the present case. 47 In any event, even if I had been prepared to go behind the negotiated and agreed outcomes, there is a further discretionary reason why I would decline to grant security for the sum sought. The respondent's approach is to seek an amount of security referable to the costs which he says are likely to be allowed in his favour on a party/party taxation. I am bound to say that the actual costs incurred by the respondent, as exemplified at [29] above, are very significant indeed. I think that it can be said with some confidence that, on taxation, costs of this magnitude are unlikely to be allowed. In fairness to the respondent, he does not suggest otherwise. This is why he seeks to rely on Mr Garrett's report. Unfortunately, for the reasons I have discussed at [21]-[26] above, Mr Garrett's mere identification of the total hours of work that would be allowable on a taxation for each level of fee earner, does not really assist me in coming to an informed view as to the amount of security that should be provided. Whilst I accept that a "broad brush" approach should be adopted, I think that the brush which the respondent seeks to use is far too broad for the amount of security he now seeks as a "top-up", particularly having regard to the amount of security that has already been provided. Indeed, I think that the originally agreed amounts provide a better indication of the amount of security that should be awarded. 48 I accept that, at the time that the parties reached their agreements on the amount of security to be provided, certain matters were not in their contemplation and that it would be appropriate to provide some measure of security in respect of this work. To this end, I accept that "top-up" security should be provided for the phases of work which the respondent has identified as: Noteholder Register Issues; Complaints regarding discovery; and Alleged Conflict of Interest. 49 However, once again, Mr Garrett's evidence does not assist me in determining the appropriate amount of this additional security. 50 With regard to Noteholder Register Issues, Mr Sharry says that the applicant sought access to the Noteholder Register as it appeared at certain dates. The respondent does not maintain this register and has confidentiality obligations in respect of it. Mr Sharry says it was necessary to engage in correspondence with the applicant's solicitors in relation to access to the register and to consider and obtain confidentiality orders. Mr Sharry also says it was necessary to conduct a detailed review of the register to determine who are or may be group members for the purpose of the proceeding. Mr Sharry says that, in all, 31 hours were required for these tasks. 51 In her affidavit, Ms Banton has argued that $1,683 should be allowed for Noteholder Register Issues, but does not provide an explanation as to how she has arrived at this figure. Ms Banton notes that one basis for claiming these fees is that the respondent's solicitors were required to engage in correspondence with the applicant's solicitors. She says that the previously agreed security included an item for correspondence and telephone attendances, which should cover that particular aspect of this work. 52 Having regard to Mr Sharry's explanation of the work involved, I do not think that Ms Banton's assessment is likely to be an accurate reflection of the security that should be provided in this regard. I am prepared to allow $5,000 for this task. 53 With regard to Complaints regarding discovery, Mr Sharry says that, up to 1 September 2015, 42.51 hours were involved in dealing with the applicant's complaints in respect of the discovery given by the respondent. Ms Banton says that, up to 1 September 2015, only two letters were exchanged between the parties on this issue. Ms Banton has argued that $902 should be allowed for this correspondence. In the absence of any real explanation from the respondent of the work involved, I am only prepared to allow additional security for the amount that the applicant has conceded. 54 With regard to the Alleged Conflict of Interest, Mr Sharry says that the applicant first raised an allegation concerning the continuing ability of counsel and the respondent's solicitors to represent the respondent in this proceeding because of a conflict of interest, in July 2015. Mr Sharry says that it was necessary for the respondent to consider these complaints; engage in correspondence with the applicant's solicitors; confer with counsel; and "consider strategy" in formulating a response. Mr Sharry says that, in all, 24.8 hours of work were required. 55 Ms Banton says that only two letters were exchanged between the parties on this issue prior to 1 September 2015 and that only six hours of Partner time ($3,150) should be allowed as additional security for this work. Once again, in the absence of any real explanation from the respondent of the work involved, I am only prepared to allow additional security for the amount that the applicant has conceded. 56 I should make clear that I do not think that any additional security should be provided in respect of the work undertaken by the respondent in relation to the so-called "Common Fund Application". I simply do not understand why any allowance should be made for this work, especially when an application was merely foreshadowed and there was no interlocutory application before the Court. Moreover, the respondent's interest in that application is, in any event, not clear to me. Further, I do not think that additional security should be provided for the "initial scoping" of the applicant's claim. The costs incurred are very large and, without further explanation of the work involved, it seems to me that these costs should be subsumed in the costs for the preparation of the respondent's defence. 57 Finally, in her affidavit, Ms Banton has expressed the applicant's willingness to accept that an allowance should be made for disbursements in the amount set out in Mr Garrett's report, namely $11,571.16. 58 Accordingly, in respect of "top-up" security, an additional amount rounded to $20,625 should be ordered.

The respondent's evidence 59 Mr Sharry has provided Mr Garrett with detailed assumptions in respect of the likely progress of the proceeding from 1 September 2015 to the first day of the trial on 27 June 2015. Mr Sharry has deposed to these assumptions in an affidavit sworn on 26 November 2015. 60 Armed with these assumptions, Mr Garrett has prepared an estimate of the party/party costs for the relevant period that, in his opinion, the respondent is likely to be allowed should he obtain an order for costs in his favour against the applicant. Mr Garrett estimates that the respondent would be allowed $1,092,906.50. As I have noted, the respondent seeks additional security of $1 million.

The applicant's evidence 61 In her affidavit, Ms Banton has deposed to her opinion that the additional security sought by the respondent in this regard is excessive. 62 Ms Banton has prepared a spreadsheet detailing what she says are reductions which should be made to the costs which Mr Garrett says would be allowable. Ms Banton says that, in her opinion, these reductions are fair and reasonable and properly reflect the likely costs that the respondent would receive for each identified task. 63 Ms Banton refers, specifically, to the following matters. 64 First, she challenges the estimate for the preparation of lay evidence. Ms Banton says that Mr Sharry has over-estimated the length and complexity of the statements to be prepared for these witnesses. 65 Secondly, the respondent proposes to call an insolvency specialist as one of its experts. Ms Banton says that in 2008, the respondent brought an application in the Supreme Court of Queensland to wind up four member companies of the Octaviar Group on the ground of insolvency. He relied on the expert evidence of Stephen Gray in that application. According to Ms Banton, Professor Gray opined that OL and Octaviar Administration Pty Ltd were insolvent as at 22 January 2008 and, based on certain assumptions, would have been insolvent prior to that date. Ms Banton says that, in circumstances where Professor Gray has already opined on matters "that are consistent with the [a]pplicant's case theory", the costs estimated by the respondent for engaging an insolvency specialist in the present case are too high and do not properly reflect the actual work required to be undertaken. 66 Thirdly, Ms Banton says that Mr Sharry's assumptions cover work required to be undertaken if the applicant were to be granted leave to amend its statement of claim. By the time of the hearing of the present application, leave in fact had been granted to the applicant: Oztech Pty Ltd v Public Trustee of Queensland (No 2) [2015] FCA 1485 (Oztech (No 2)). Ms Banton argues that, in the first tranche of security that has been given, the applicant has already paid $18,560 as security for costs associated with an amended statement of claim and an amended defence, and $42,380 as security for costs associated with the question of particulars relating to an amended statement of claim, and considering a reply. 67 Ms Higinbotham reviewed Mr Garrett's report. She said that she does not consider that Mr Garrett's estimates reflect the likely outcome of a taxation of costs by a taxing officer. Ms Higinbotham expressed several reasons for this. 68 First, while Ms Higinbotham accepted that the attendance of both a Senior Associate and Junior Solicitor at conferences with witnesses and counsel may be reasonable when costs are assessed on a solicitor/client basis, she said that it did not follow that such an allowance would be fair and reasonable on a party/party basis, particularly for attendances on counsel. 69 Secondly, while Ms Higinbotham accepted that the attendance of a fee earner at Partner level might be reasonable when costs are assessed on a solicitor/client basis, she said, once again, that it did not follow that such an allowance would be fair and reasonable for costs assessed on a party/party basis. She said that it was not her experience that a taxing officer would allow attendances by three lawyers, notwithstanding the claimed importance of the conference. Ms Higinbotham said that this was particularly so in relation to conferences with counsel. 70 Thirdly, Ms Higinbotham criticised Mr Garrett's allowance of solicitor rates for collating documents. Ms Higinbotham said that this was contrary to the specific scale item for this task in Sch 3 of the Federal Court Rules 2011 (the Rules). 71 Fourthly, Ms Higinbotham said that, in undertaking his assessment, Mr Garrett, in many instances, did not apply what Ms Higinbotham said was the usual practice in the Court of using electronic versions of documents and e-filing. 72 Fifthly, Ms Higinbotham criticised Mr Garrett's allowances for repeated briefs to counsel. Ms Higinbotham said that while Mr Garrett's allowances might reflect a practice prior to the introduction of Sch 3 of the Rules in 2011, it was not her experience that such charges would be allowed by a taxing officer, unless there was a significant change in the conduct of a matter. 73 Sixthly, Ms Higinbotham said that, in many instances, Mr Garrett has adopted time estimates for a fee earner at Partner level regardless of whether it was appropriate to allow such work at Partner rates. 74 Seventhly, Ms Higinbotham said that "extraordinarily large claims" were made for witness statements, which appeared to be a conversion of the number of hours estimated by Mr Sharry to word counts rather than a calculation based on Item 2.1 of the scale in Sch 3 of the Rules (which allows $52 per 100 words). 75 Finally, Ms Higinbotham noted what appears to have been a transcription error in Mr Garrett's report in relation to a particular time estimate. I note that this error has been corrected by Mr Garrett. 76 Ms Higinbotham was asked to assume that the reductions made in Ms Banton's spreadsheet were "accurate". Based on this assumption, and the assumption that the respondent's solicitors' rates of charges are applied, Ms Higinbotham said that the costs estimated by Ms Banton would be found to be reasonable on a taxation on a party/party basis. 77 I should add that while Ms Higinbotham said that it was her experience that an allowance/uplift for skill, care and responsibility is likely to be added on taxation by a taxing officer, she has been instructed to assume that Ms Banton's time estimates involve no discounting. Based on that assumption, Ms Higinbotham considered that "no uplift is appropriate on the instructions I have received".

The respondent's submissions 78 The respondent submits that he has adopted an orthodox approach to estimating his likely allowable costs. The respondent criticises the applicant's approach of, once again, instructing Ms Higinbotham to adopt Ms Banton's estimates of the hours that would be allowed on a taxation, rather than permitting Ms Higinbotham to form her own expert opinion on that matter. 79 Further, the respondent notes that no allowance was made by Ms Higinbotham for skill, care and responsibility, despite her expressed view, based on her experience, that an uplift is likely to be made by a taxing officer. 80 As to Ms Banton's criticism of the need for any extensive expert insolvency evidence, the respondent argues that the previous evidence given by Professor Gray is of limited relevance, if any, to the evidence which he (the respondent) proposes to call on this matter at trial. 81 Finally, the respondent reasserts his criticism that the applicant's approach is inappropriate in that the applicant seeks to debate matters of detail rather than taking a broad brush approach to the amount of security that should be ordered. 82 The respondent also argues that there is no evidence that security in the amount sought cannot be provided or, if ordered, would stifle the applicant's claim. The respondent points to the fact that the litigation is being funded by a third party for commercial gain and submits that this should support a more liberal order for security. The respondent argues that this consideration is particularly apposite in the present case because, if costs are awarded in his favour, the inevitable shortfall between the security provided and the respondent's recoverable costs on taxation, would be borne by innocent noteholders, whose share of the trust estate will (subject to judicial advice) be charged with the shortfall.

The applicant's submissions 83 The applicant submits that the largesse which it says is evident in the respondent's claim for "top-up" security is also evident in this part of its application. The applicant points, specifically, to the allowance sought by the respondent in respect of the preparation of his lay and expert evidence. 84 The applicant also argues that, contrary to the respondent's submission, the Court should not take a liberal approach to determining the amount of security. The applicant argues that the purpose in making an order for security is to mitigate against the hardship that a successful respondent might suffer if an order for costs is not satisfied. The applicant says that there is no such risk in the present case because the respondent has a right of indemnity out of the trust estate. The applicant also submits that the authorities do not favour a liberal approach to the assessment of the amount of security simply because the proceeding is being funded by a litigation funder.

Consideration 85 I should state at the outset that I do not regard the fact that the respondent has an entitlement to indemnity out of the trust estate to be a reason for not requiring the applicant to provide proper security for the respondent's costs. I also do not regard the fact that the applicant is funded by ILP to be a reason for assessing the amount of security to be provided more liberally than if the applicant was not so funded. 86 Mr Garrett has provided a detailed analysis of the costs that are likely to be assessed in the respondent's favour on a party/party taxation. That assessment is, of course, based on Mr Sharry's assumptions. I note Ms Banton's disagreement with a number of these assumptions, particularly in relation to the anticipated costs of preparing the respondent's lay and expert evidence. However, I am not minded to interfere with the assessment made by Mr Garrett simply on the basis of Ms Banton's belief that the respondent has over-estimated the length and complexity of its intended witness statements. I have no reason to go behind Mr Sharry's understanding of the nature of the evidence that the respondent proposes to call or the appropriateness of that evidence. 87 Ms Higinbotham has also commented on Mr Garrett's assessment of these costs. She referred to these costs as "extraordinarily large claims", but has not provided a reason for that view. I do not regard Mr Garrett's assessment to be one that is, self-evidently, "extraordinarily large". The case is obviously one of significant complexity. The applicant has sought fit to make a number of serious allegations. The respondent is entitled to defend himself. I have no reason to think that his defence will be extravagant or otherwise unreasonable. 88 Ms Higinbotham also criticised Mr Garrett's assessment on the basis that it appears to be a conversion of a number of hours estimated by Mr Sharry to word counts. I do not think that this criticism is correct. Mr Sharry's assumptions include an estimate of the number of pages required for each witness statement, from which Mr Garrett has estimated a word count and then applied Item 2.1 of the scale in Sch 3 of the Rules. 89 Ms Banton has argued that account should be taken of the fact that $60,940 has already been allocated in the first tranche of security for costs associated with an amended statement of claim, particulars in respect of the amended statement of claim, an amended defence and a reply. For the purposes of the present aspect of the respondent's application for further security, Mr Garrett appears to have assessed approximately $52,048 for work of the same scope. It seems to me that this amount should be deducted from the total amount of the security now sought. 90 Mr Garrett's assessment also includes costs for an application for further discovery ($24,045) and for an application to amend the statement of claim ($19,113). Both of these matters were dealt with by orders made on 23 December 2015: Oztech (No 2). For reasons which I will publish concurrently with these reasons, I have concluded that the costs of the application for leave to amend the statement of claim should be the applicant's costs in the cause. It follows that security should not be provided for the respondent's costs in this regard. The applicant's claim for further discovery against the respondent succeeded principally on the basis that leave to amend the statement of claim was granted. I have determined that no order for costs should be made in respect of that application. It follows, therefore, that security should not be provided for the respondent's costs of the application to provide further discovery. Therefore, the sum of $43,158 should also be deducted from the amount of the security now sought. 91 I note Ms Higinbotham's criticisms directed to Mr Garrett's assessment (see [68]-[74] above). Ms Higinbotham has not provided any adjustments to Mr Garrett's assessment to reflect the consequences of her disagreement. Mr Garrett has noted Ms Higinbotham's questioning of the appropriateness of certain rates of charge that he has applied in his report. Mr Garrett has said that, to the extent that he has used rates in excess of standard rates under the relevant scale, he has done so because he has considered that the higher rates he has adopted would be applied as a matter of discretion on a party/party assessment in this matter. 92 I do not propose to resolve that debate for the purpose of deciding the amount of security to be provided. Whilst noting this disagreement, I can see no reason why I should not be guided by Mr Garrett's detailed assessment. 93 While Ms Banton has given evidence of the reductions she says should be made to Mr Garrett's assessment based on Mr Sharry's assumptions, I have not had the benefit of Ms Higinbotham's independent views on the matter. Ms Higinbotham has been instructed to adopt Ms Banton's reductions. On the other hand, Mr Garrett has given an independent assessment. Save in the respects I have noted, I can see no reason why, as a general approach, I should not proceed to deal with the question of further security by reference to Mr Garrett's assessment. 94 For these reasons, I have come to the view that, in respect of costs for this period, the applicant should provide security in the sum of $905,000.

Disposition 95 The applicant is to provide further security in the sum of $925,625 ($905,000 + $20,625). 96 In her affidavit, Ms Banton has said that the further security should be paid into Court by means of a cash deposit. This is appropriate. Ms Banton has also said that further security should be provided on a staged basis in accordance with the Court's timetable for the proceeding. That timetable requires the applicant to file and serve its reply to the amended defence by 18 March 2016; the applicant to file and serve its evidence by 24 March 2016; the respondent to file and serve its evidence by 18 May 2016; and for the applicant to file and serve its lay evidence in reply by 10 June 2016. In the circumstances, I can see no utility in providing the further security in stages. The applicant has adduced no evidence to suggest that it will have any difficulty in providing the further security as a lump sum. I certify that the preceding ninety-six (96) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.

At a glance

Court

Decision date

Before

Source

Judgment (14 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (3)