Plaintiff v First Defendant

2 In summary, the defendants submit that the plaintiff is a corporation and there is reason to believe, or it appears by credible testimony that there is reason to believe, that the plaintiff has insufficient assets to pay the costs of the defendants if they are successful in their defence. This is based on evidence before the Court that the plaintiff is a '$1 company'.

3 In summary, the plaintiff raises two preliminary or jurisdictional issues in opposing this application; that:

(1) the defendants have not established that there is reason to believe that the plaintiff has insufficient assets to pay the costs of the defendants if they are successful in their defence; and

(2) as the defendants are not legally represented and incurring no costs, the Court has no jurisdiction to order security for costs.

4 Further, the plaintiff submits that, in the exercise of its discretion, the Court should decline to order security for costs primarily because of the defendants' delay in bringing this application and the costs that have been incurred by the plaintiff in the meantime.

5 For the reasons that follow, I will order, subject to the satisfaction of certain conditions, that the plaintiff provide security for the defendants' costs up to an amount of $70,000.

7 The original plaintiff was NRA Developments Pty Ltd ('NRA'). NRA alleged that between 2010-2012 the defendants, as directors or de facto directors of NRA, misappropriated the assets of NRA. This included by paying money to companies associated with the defendants for services which were not provided and/or for amounts not related to NRA. In substance, NRA alleged dishonest conduct by the defendants in making these payments.

8 The defendants filed their defence on 21 March 2017.

9 On 29 March, the solicitors for the defendants, Lennon Mazzeo, sought from the plaintiff security for costs of $76,000, calculated up to and including the first day of trial. They threatened to bring an application for security for costs. On 3 April 2017, the solicitors for the plaintiff indicated it would not provide security and would oppose any application. No such application has been made until now.

10 On 1 July 2017, the Lennon Mazzeo partnership ceased and Mr Mazzeo continued to act as solicitor for the defendants for a short period. By that time, the defendants had spent in excess of $60,000 defending the proceeding. The defendants' money for legal fees ran out.

11 In late July 2017, Mr Llewellyn informed Mr David Quinn, who was then the sole director of NRA, that he would be declaring himself bankrupt in 7 to 10 days. Directions hearings in the proceeding, on 18 August 2017 and 1 September 2017, were adjourned in light of the impending bankruptcy. In fact, the defendants filed a joint debtor's petition and were declared bankrupt on 2 November 2017. The plaintiff submits this delay was solely the fault of the defendants. The defendants submitted that they informed NRA about their possible bankruptcy to avoid unnecessary costs and expenses.

12 As the plaintiff's claim against the defendants existed prior to their bankruptcy, it was listed in the statement of affairs with the trustee in bankruptcy. However, NRA sought leave to continue against the defendants in bankruptcy and leave was granted. As a result, this proceeding can be pursued against the defendants and damages obtained against them, notwithstanding they are bankrupt.

13 The defendants did not defend the leave application as the trustee in bankruptcy told them there would be no payments available to unsecured creditors and they had no money for legal costs to do so. Leave was granted on 26 February 2018.

14 On 6 April 2018, NRA went into voluntary administration. It subsequently went into liquidation. As noted above, Mr Quinn was the sole director of NRA. It appears that Mr Quinn arranged for the plaintiff, of which he is also the sole director, to obtain an assignment of the causes of action against the defendants, in this and another proceeding, from the liquidator of NRA for $25,000. The defendants were not aware of this.

15 On 3 July 2018, the current plaintiff was substituted as the plaintiff in this proceeding. On that day, orders were made for the plaintiff and defendants to file outlines of evidence and for the trial to be fixed on 21 August 2018 on an estimated duration of two days. This estimate was on the basis that the proceeding was undefended. The plaintiff filed 10 outlines of evidence on 10 August 2018.

16 However, sometime in August 2018, Mr Cannon informed the Court that he wished to defend this proceeding. As a result, on 16 August 2018, the trial date was vacated. On 20 August 2018, the trial was re-fixed for 4 days commencing on 23 October 2018. Orders were made for the filing of witness statements including by the defendants. At that stage, Mr Llewellyn had not given any indication that he wished to defend the proceeding and was required to inform the Court by 14 September 2018 whether he wished to do. On 14 October 2018, one month late, he gave notice that he intended to defend the proceeding.

17 I note that on 3 September 2018, the plaintiff filed eight amended outlines of evidence.

18 At a directions hearing on 17 October 2018, to enable Mr Llewellyn to prepare his defence, the date for the commencement of the trial was postponed until 4 March 2019 with an estimated duration of 10 days. The defendants were required to provide further discovery and documents they wished to be included in the court book. A directions hearing was fixed on 21 November 2018 to enable any issues in relation to the court book to be resolved. Orders were also made for the defendants to file and serve any outlines of evidence by 23 November 2018 and for the plaintiff to file and serve any amended or additional outlines by 7 December 2018.

19 The matter returned to court on 21 November 2018. By that time, issues in relation to the court book had been resolved. The Court ordered that the plaintiff file and serve any additional outlines of evidence by 30 November 2018 and the defendants file and serve their outlines of evidence by 14 December 2018. The directions hearing was adjourned to 1 February 2019.

20 The plaintiff filed two further outlines of evidence on 3 December 2018. The first defendant filed his outline on 9 January 2019. An outline of the second defendant and of Jason Hill has also been filed.

21 On 1 February 2019, Efthim AsJ indicated that the matter should be heard by a judge of this Court. As a result, the trial date of 4 March 2019 was vacated. The proceeding has now been referred to me.

22 The defendants sought from the current plaintiff security for costs in the sum of $50,000 on 14 December 2018. The request for security was refused. Consequently, this application was filed by the defendants on 15 March 2019.

23 The defendants seek security for costs in the sum of $80,000 so that they may be represented at the trial by a barrister. The defendants are concerned about the allegations of dishonesty against them, which they deny, and their potential liability after their bankruptcy. However, because of their bankruptcy, neither can afford legal representation.

24 The defendants have supporters who have indicated to the defendants that funds for a barrister could be forthcoming if there is a reasonable prospect they could get their money back should the defendants be successful in defending the proceeding. As a result, the defendants seek security to cover the costs of a barrister only, to represent them at trial with an estimated duration of 10 to 15 days. They consider that the trial will take longer if they appear for themselves.

25 Rule 62.02(1)(b) of the Rules relevantly provides that where the plaintiff is a corporation and there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so, the Court may, on the application of a defendant, order that the plaintiff give security for the costs of the defendant of the proceeding and that the proceeding as against that defendant be stayed until the security is given.

26 Section 1335(1) of the Act relevantly provides that where a corporation is plaintiff in any action or other legal proceeding, the Court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

27 The principles to be applied in determining applications for security for costs both under the Rules and the Act are clear. They were summarised by Croft J in Trility Pty Ltd v Ancon Drilling Pty Ltd ('Trility').[1] In summary:

(1) it is a condition of security that the defendant satisfies the Court that there is reason to believe the plaintiff will be unable to pay the defendant's costs if the defendant is successful;

(2) if that is established, the Court has an unfettered discretion, which must be exercised judicially having regard to all the circumstances of the case, to award security. The factors to be taken into account include, relevantly, the merits of the claim, the reason for the impecuniosity of the plaintiff, delay in bringing the application and costs incurred in the intervening period.

29 In Trility, Croft J adopted the comments of Maxwell P and Buchanan JA in Livingspring Pty Ltd v Kliger Partners[2] to the effect that the Rules and the Act require the making of a judgment or a risk assessment about the ability of the plaintiff to meet an order for costs. Their Honours noted that such an assessment is 'of necessity, imprecise' and calls for a 'practical, commonsense approach to the examination of the corporation's financial affairs'. Their Honours also noted that the threshold is low: but it reflects the policy of the provision, which is to protect the defendant against the risk of the plaintiff corporation's impecuniosity.

30 Mr Cannon has conducted searches of the ASIC register. That search revealed that the plaintiff has $1 paid up capital. Mr Cannon deposed that he is not aware that the plaintiff has any assets or has ever traded.

31 No financial statements, tax returns or audited accounts have been provided to suggest the plaintiff is anything more than a $1 company with resources or ability to pay a costs order. Although Mr Quinn has filed an affidavit in opposition to this application, he has not produced any financial information of the plaintiff to otherwise suggest it has sufficient resources to pay a cost order in this proceeding.

32 As a result, I have concluded that on the evidence before me there is reason to believe and, by credible testimony there is reason to believe, that the plaintiff has insufficient assets in Victoria and/or will be unable to pay the costs of the defendants if they are successful in their defence.

33 The plaintiff submits that the Court does not have jurisdiction to order security for costs because the defendants do not presently have legal representatives. This submission is based on the words in r 63 of the Rules and s 1334 of the Act, namely, security for 'the costs' of the defendant.

34 While the usual case is that such an application is made when the defendants are legally represented, I do not consider that the Court has no jurisdiction to order that there be security for costs in circumstances like this. In my view, the Court has power to order security for costs paid or to be paid for the defendants' barrister to prepare for and appear at trial.

35 The defendants have indicated that they wish to engage a barrister for the trial to defend this proceeding. There are serious allegations made against them which they seek to defend, both for the purpose of their reputations and to avoid any additional liability after their bankruptcies.

36 They cannot do so at present because they do not have sufficient funds due to their bankruptcies. However, they have associates who are willing to fund their defence of the proceeding. But those associates have indicated that they wish to have security for the funds provided for the defendants' costs if the defendants are successful in circumstances where the plaintiff only has $1 paid-up capital. In my view, that is a reasonable position for their associates to adopt.

37 I am of the view, consistent with the purpose of an order for security for costs, that the Court may order that the plaintiff provide security in respect of a future engagement of solicitors or counsel when that engagement takes place and to the extent that the defendants are put in funds to do so. Should costs be paid or funds be set aside for costs to be paid for the defendants' barrister to prepare for and appear at trial, I consider that security may be ordered for such sums. However, the form of order for such requires particular consideration. I will address this further below.

38 I note that, although not relevant to the issue of jurisdiction, legal representation of the defendants will be of assistance not only to them but also to the Court and perhaps the plaintiff: it is likely to save significant time at trial and facilitate the just and efficient resolution of the real issues in dispute.

39 I will now deal with each of the discretionary considerations relevant to this application set out above.

40 In my view, is difficult to assess the merits of the plaintiff's claim on an interlocutory basis. However I am prepared to assume that the plaintiff has reasonable prospects of success in this proceeding, which involve serious allegations.

41 There is no evidence before me that the orders sought by the defendants would frustrate the plaintiff's claim.

42 There is evidence before me that the defendants were the cause of the impecuniosity of NRA. Mr Quinn deposed that NRA went into liquidation following a statutory demand from the ATO for approximately $473,000. He deposed that debt was incurred by NRA as a consequence of the actions of the defendants. However, NRA is now in liquidation and its causes of action against the defendants have been assigned to the plaintiff. The fruits of this litigation will go to the current plaintiff: there is no evidence to the contrary.

43 Counsel for the plaintiff submitted that it would be an odd result if an order for security would not be made against NRA on the grounds that the defendants contributed to its impecuniosity but was made against the plaintiff. I disagree. The assignment of the causes of action to the current plaintiff is a material and relevant change. NRA is not the party now opposing this application for security for costs: the current plaintiff is. In my view, the current plaintiff is not relevantly standing in NRA's shoes for the purpose of this security for costs application.

44 In these circumstances, I do not consider the cause of the impecuniosity of NRA relevant to the exercise of my discretion. Even if it were relevant, given that this proceeding is not being conducted for the benefit of NRA, it would weigh very lightly in the matters taken into account in the exercise of my discretion.

45 Delay is a significant factor. This is because it can be unfair to a plaintiff who has continued to prosecute a claim when it would not have done so if security was required to be provided at an earlier date. This applies to the current plaintiff given that no security for costs application was made when these causes of action were assigned to it by NRA.

46 The plaintiff relies upon the defendants' delay in issuing this application since the proceeding was issued. I am not convinced that the delay prior to the assignment is of great relevance to this application save to the extent that the plaintiff might have considered that such an application would not be pursued. I will deal with this further below.

47 For example, the plaintiff relies upon the costs incurred by NRA prior to July 2018. Mr Quinn deposes that NRA expended approximately $154,000 on legal costs and expenses, including counsel's fees. But, once again, those are the fees of a company now in liquidation and not incurred by the current plaintiff.

48 In this case, I am satisfied that there was a reason why security for costs was not pursued in the second half of 2017, namely, as a result of the lack of funds and subsequent bankruptcies of the defendants. There then followed the liquidation of NRA. In my view, that is some explanation for the delay.

49 As to the delay since mid-2018, Mr Quinn deposed that, since the plaintiff was substituted as a party to the proceeding, it has expended $58,000 on solicitors fees and $28,000 on counsel's fees. That is a significant amount of money. As noted above, during this period many outlines of evidence have been filed and a court book prepared. I note that a request for security was made by Mr Llewellyn on 14 December 2018. However that was after most of these expenses had been incurred.

50 Further, the plaintiff submits that since July 2018 there have been two adjournments of the trial due to the conduct of the defendants: first, in August 2018, when Mr Cannon decided to defend the proceeding and second, in October 2018, when Mr Llewellyn belatedly decided to do so also. I accept that is so.

51 In my view, any relevant delay for the purposes of this application was between mid-2018 and December 2018, when Mr Llewellyn sought security of $50,000. In my view, that period of delay is significant in the context of this proceeding. This was because it appears that it was during this period that significant work was conducted, including in relation to the plaintiff's outlines of evidence and the preparation of the court book for trial. As I set out above, the plaintiff has incurred legal costs of approximately $90,000 in relation to this work. I consider such delay and expense to be a significant factor. However, I do not consider it to be determinative in all the circumstances of this application.

52 It is then necessary to consider the fact that the failure to issue a security for costs application, despite the threat of such in March 2017, may have been relevant to the plaintiff in deciding to acquire the causes of action assigned to it. I think this is a relevant issue in the exercise of my discretion. However, Mr Quinn did not depose in his affidavit that this was a relevant or material issue to him at the time the plaintiff negotiated and obtained the assignment of the rights of NRA in relation to the subject matter of this proceeding.

53 The plaintiff submitted that the evidence put forward by the defendants regarding the quantum of security sought was inadequate. I disagree. The defendants seek $80,000 for a junior counsel to prepare for and appear at a trial of 10-12 days' estimated duration. Experience in the Commercial Court indicates to me that junior counsel rates in commercial proceedings may vary between approximately $2,500 to $4,500 per day. On the assumption that junior counsel will be retained at the rate of approximately $3,500 per day, the amount sought seems to be a not unrealistic estimate. However, in my view, an appropriate sum for the costs of a 12 day trial (including 8 days' preparation) is $70,000.

54 I have considered the nature of the proceeding, the merits of the plaintiff's claim and the issue of delay and the costs incurred by the plaintiff as a result. After balancing all of these factors, subject to fashioning an appropriate order, I consider that the interests of justice require that the defendants should be entitled to an order for security for costs to the sum of $70,000.

55 As I have said, the issue of delay is a significant factor. However, so too is the entitlement of the defendants to defend the serious allegations made against them which may result in liabilities that outlast their current bankruptcies. The defendants' current bankruptcies mean that they have no financial means to defend the proceeding and must rely upon others' to do so. On balance, I consider that it is in the interests of justice that their associates who provide funds for the costs of the defendants be entitled to security in the event that the defendants are ultimately successful.

56 The Court will not make an order which is not workable or which cannot be given effect to. The unusual circumstances of this application are relevant to the form of order to be made. In particular, in order to minimise costs, the defendants do not intend to engage solicitors. In the ordinary course, solicitors are engaged and file with the Court a notice that they act for a defendant. They file a notice of cessing to act should their retainer end. However, that will not be the case here.

57 In my view, in this case, the aim of the form of order is to ensure that:

(1) the plaintiff is only required provide security if defendants engage counsel to prepare for and appear at trial and to the extent that funds are advanced for that purpose; and

(2) if there is any relevant change, such as the withdrawal of funds or the termination of counsel's retainer, the plaintiff can apply to have the security released.

58 I raised issues in relation to the form of orders during the course of argument. I proposed orders to the effect that within 14 days of the defendants providing evidence to the plaintiff that:

(1) funds have been deposited into the trust account of a barristers' clerk to brief a barrister to prepare for and appear at trial; and

(2) a barrister on the list of that clerk has entered into an agreement to prepare for and appear at trial on behalf of the defendants, without an instructing solicitor;

the plaintiff shall pay into Court as security for costs an equivalent amount, up to a maximum amount.

59 Further, I proposed that within 48 hours of funds being withdrawn from the barrister's clerk's trust account, other than to pay the barrister for work done, and/or the cessation of the barrister's agreement for any reason, the defendants must inform the plaintiff of the same so that it may consider its position and seek to set aside or vary such orders if desired.

60 The defendants suggested alternative orders which turn upon undertakings by their associates to provide funds and/or undertakings by counsel to accept their brief. I did not have any evidence before me of any such undertakings. In any event, I did not and do not consider it appropriate to order security on that basis in these circumstances.

61 In my view, the security is in relation to costs incurred or to be incurred: not undertaking to pay for or undertaking to accept a brief.

62 I accept that the defendants may have some difficulty in meeting even the orders I proposed. This is because of the uncertainties in respect of their associates' funding arrangements. It is also because there is some uncertainty that a barrister will be prepared to accept a brief to prepare for and appear at the trial of this proceeding without instructing solicitors. In this regard, I note that the plaintiff said that there were impediments to counsel accepting a brief in such circumstances in accordance with the Legal Profession Uniform Conduct (Barristers) Rules 2015 (the 'Conduct Rules'). I have now reviewed those rules.

63 While it is, at present, properly a matter for counsel to consider in deciding to accept a direct brief to appear at trial, in my view, to do so does not appear to be inconsistent with rr 11 to 16 of the Conduct Rules. I note that r 11 of the Conduct Rules provides that barristers' work includes appearing as an advocate, preparing to appear as an advocate, negotiating for a client with an opponent to compromise a case, representing a client in a mediation or arbitration or other method of alternative dispute resolution, giving legal advice and such other work as is from time to time commonly carried out by barristers.

64 However, I note that under r 101(k) of the Conduct Rules, counsel must refuse to accept or retain a brief or instructions to appear before the court if there are reasonable grounds for him or her to believe that the failure of the client to retain an instructing solicitor would, as a real possibility, seriously prejudice the barrister's ability to advance and protect the client's interests in accordance with the law, including the Conduct Rules.

65 Ultimately, these are matters for the defendants if they seek to obtain the benefit of these orders for security for costs. As is evident from the orders I propose to make, no security will in fact be required to be put forward until evidence has been provided to the plaintiff that satisfactory arrangements are in place and funds have in fact been advanced for the defendants' costs.

66 There is one final matter I wish to raise. The usual form of order is that the plaintiff provide security in respect of the defendant's costs. It may be that owing to the defendants' statuses as bankrupts there are unforeseen consequences of funds being advanced for use by the defendants. For example, there may be an argument open to the trustee in bankruptcy of the defendants that any funds provided may be subject to a claim by the trustee in bankruptcy. Such issues were not raised in argument but may arise. It may be appropriate for the defendants and/or the associates of the defendants who may wish to provide financial assistance to the defendants to seek legal advice on such an arrangement, including whether any funds provided might become the property of the defendants and claimable by the trustee in bankruptcy.

67 In these circumstances, I propose to order that:

1. Within 14 days of the defendants providing written evidence to the plaintiff that:

(a) funds have been deposited into the trust account of a barrister's clerk to brief a barrister to prepare for and appear at trial on behalf of the defendants; and

(b) a barrister on the list of that clerk has entered into an agreement to prepare for and appear at trial on behalf of the defendants without an instructing solicitor;

the plaintiff shall pay an equivalent amount into Court, or provide such other form of security as is acceptable to the Associate Judge who is the Senior Master, as security for the defendants' costs of defending this proceeding, up to a maximum of $70,000.

2. Within 48 hours of any such funds referred to in order 1(a) above being withdrawn from the barrister's clerk's trust account, other than to pay the barrister for work performed, and/or the cessation of the barrister's agreement for any reason, the defendants must inform the plaintiff in writing of the same so that the plaintiff may consider its position and seek to set aside or vary these orders.

3. Costs of this application are reserved.

4. There is liberty to apply.

68 I also propose to note in 'other matters' of the authenticated Order that these orders are made to require the plaintiff to provide security for the costs of the defendants defending this proceeding which are being provided by associates of the defendants given that the defendants are bankrupt.

[1] [2013] VSC 577 [8]-[16].

[2] [2008] VSCA 93; (2008) 20 VR 377.