S Lander & Partners Pty Limited v Todd and anor

Judgment

1. By notice of motion filed 20 June 2017, the defendants seek an order that the plaintiff provide security for the first and second defendants' costs within 28 days in an amount to be determined by the Court and that the proceedings be stayed until such security is given. Those orders are sought pursuant to rule 42.21 of the Uniform Civil Procedures Rules 2005 (NSW) and/or s 1335 of the Corporations Act 2001 (Cth).
2. The defendants read two affidavits of its solicitor Edward Samuel Timothy Burrell sworn 20 June 2017 and 1 August 2017 and tendered a bundle of material which became Exhibit A on the hearing of the notice of motion.
3. The plaintiff, which opposes the precise form of the orders sought but does not seriously resist the proposition that some form of order for security of costs may be appropriate, read an affidavit of Duncan Lander sworn 11 July 2017 and tendered six documents (marked Exhibits 1 - 6). This evidence largely related to the value of a property owned by Duncan Lander and various encumbrances upon the property. There were certain deficiencies in the substance of the plaintiff's evidence, but it was calculated to establish that an undertaking by Duncan Lander, secured by way of registered or unregistered mortgage would be sufficient to satisfy the defendants' application to have their costs secured.
4. A great deal of the evidence tendered or read by the defendants was designed to establish that the plaintiff corporation would not be in a position to meet a costs order if one were made against it at the conclusion of the hearing. It is unnecessary to go into the detail of that evidence because, ultimately, this issue was not in dispute. It is sufficient to say that the evidence established that the plaintiff is a trust corporation, which has no assets, a large number of potential beneficiaries (one of whom is Duncan Lander) and is currently not trading in any meaningful way. The evidence suggests that it exists largely, if not exclusively, for the purpose of conducting and continuing this litigation. Its tax returns, financial statements and bank accounts establish that it has no substantial assets and made no profit during the past couple of years.
5. Accordingly I am satisfied of the threshold question. That is, the defendants have established that there is reason to believe that the plaintiff will be unable to meet the defendants' costs of proceedings if ordered to pay them.
6. Turning to the discretionary grounds upon which the Court might nevertheless decline to make an order for security of costs, the matter principally relied upon by the plaintiff was the delay between the time of the initiation of proceedings and the time that the notice of motion for security of costs was filed. At first blush, there was a significant delay. The statement of claim was filed on 17 May 2016. The notice of motion was not filed until 20 June 2017. It is accepted that an application for security of costs should be made expeditiously in order that the parties, and in particular the plaintiff, not be put to the expense of preparing the litigation only to be confronted with a conditional stay some time down the track: see, for example, Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 at 309; Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497; Li v NSW [2013] NSWCA 165 at [38]; Smail v Burton (1975) 1 ACLR 74.
7. The defendants submitted, and produced evidence to support the submission, that it was not aware of the plaintiff's impecuniosity until late March 2017. It became aware at a directions hearing before the Registrar when counsel for the plaintiff said, "the plaintiff's trustee company was the owner and or lessor of the particular farming properties back in 2010 and is being kept alive effectively for the purpose of these proceedings." Then, on around 18 April 2017, the solicitor considered the contents of an affidavit filed by Duncan Lander and various annexures to that affidavit. It was then, according to the defendants' solicitor, that the defendants' lawyers realised that the plaintiff was not, as the defendants had hitherto believed, producing and trading in the business which brought the parties into contact with one another in 2010 and 2011 when the cause of action is said to have arisen. As to that cause of action, it is only necessary to state in the briefest terms what the case is about.
8. The plaintiff was engaged in growing crops and contracted with the defendants to provide it with agronomy advice. The plaintiff asserts that the advice provided by the defendants was deficient and negligent and that, as a result, the crop for the relevant year either failed or yielded substantially less grain than would ordinarily have been expected. As a result, the plaintiff suffered loss and damage. The plaintiff pitches its case on three alternative legal bases, but the factual substance of each is the same. The legal bases are breach of contract, tort (that is, negligent advice) and misleading and deceptive conduct under the Competition and Consumer Act 2010 (Cth). The substance of the defendant's defence is that the failure of the crop was caused by unpredictably high rainfall rather than as a result of any advice provided by the defendants to the plaintiff.
9. Whatever may be the rights and wrongs of that dispute, the defendants say that its dealing with the plaintiff and the terms of the statement of claim caused it to believe that the plaintiff was a corporation of substance and that it (the plaintiff) was farming various properties in the area around Grenfell and Forbes.
10. There was a somewhat spirited debate as to whether the defendants ought to have known that the plaintiff was essentially a shell of a company at the time that the statement of claim was first served upon it, or at some stage shortly thereafter. This debate centred around certain nuance in the pleadings themselves as well as in a document of which the defendants were aware being a Crop Loss Report of Ken Bullen (of Cerno Agriculture) dated 24 January 2014. I will adopt the nomenclature employed by counsel and refer to this as the Cerno Report.
11. I accept that the statement of claim refers to the extensive farming operation of the plaintiff during the period of 2010 to 2011. It does not, in terms, refer to any ongoing farming activities on the six properties referred to in the statement of claim. Equally, I accept that the Cerno Report is open to the interpretation that the plaintiff had ceased to grow or trade in grains. However, the Cerno Report, at least in the relevant part to which I was taken, was a model of ambiguity. The relevant section of the report, under the heading "4. Plaintiff and Properties" said at paragraph 4.3: "The Plaintiff has been farming in the Forbes and Grenfell district since 1950. After Mr Duncan Lander and Mr Warren Lander became directors and shareholders in the company, there has been a concerted emphasis on grain production, moving away from mixed farming practices. The Plaintiff now only trades in livestock if the season or opportunity arises and only on the non arable country. As a result of this management change, the Plaintiff's historical average grain production is 3.70 tonnes per hectare for wheat, which is above the district average."
12. That part of the report could be taken to mean a number of things. However, it is not clear that the plaintiff was no longer, as at the date of the report, a profit making farming enterprise.
13. The plaintiff submitted that a diligent solicitor would have been alerted to the possible impecuniosity of the plaintiff as a result of its corporate structure. Reference was made to observations of Harrison AsJ concerning similarly structured trust companies in Equity Trust Ltd v RM Walsh land Holdings Pty Ltd (2012) NSWSC 427 at paragraphs [33] through [36].
14. On the other hand, the defendants rely on the unchallenged evidence of its solicitor Edward Burrell who asserted in paragraph 8 of his affidavit: "Prior to reading the Duncan Lander affidavit, I understood that the plaintiff: (a) carried on the business of farming / grazing; (b) generated any income from the business of farming / grazing; and (c) would be able to pay the costs of the defendant if ordered to do so."
15. I am satisfied that this was indeed the belief of the defendants' solicitor and of the defendants themselves. While some solicitors may have undertaken checks at an earlier stage to determine whether the plaintiff was able to meet a costs order, I am not satisfied on the material before me that a diligent solicitor ought to have known or, as it was put at one stage in argument, "must" have known that the plaintiff corporation was in essence an empty shell which existed almost exclusively for the purpose of conducting the current litigation.
16. Nevertheless, there has been some delay as a result of the solicitor failing to undertake searches at an earlier stage. I am not satisfied that this disentitles the defendants to the order it seeks but it can be reflected in the amount of costs for which security should be provided. Indeed, counsel for the plaintiff did not submit that the delay was a discretionary factor that would lead the Court to refuse to make some form of order for security for costs. In light of the evidence, this was a candid and responsible position for counsel to take.
17. The plaintiff did not assert that any other discretionary factor disentitled the defendants to some form of order to secure its position against the possibility of a cost order being made against the plaintiff.
18. However, the plaintiff's position on the notice of motion was that there were forms of order that could be made that were less onerous on the plaintiff than the standard form of order that money be paid into court or the costs be secured by way of bank guarantee. In particular, the plaintiff submitted that a written undertaking by Duncan Lander, secured by a "registered or unregistered mortgage", could secure the defendants' position.
19. It was to this issue that Exhibits 1 to 6 were relevant. Mr Lander is the owner of the property known as "Glenelg". Exhibit 1 was a valuation report valuing that property at $3,600,000. There is a registered mortgage against that property to the National Australia Bank. Exhibit 5 was an email from the bank, indicating that the current debt is $2,550,000.00. This suggests that, subject to what follows, Mr Lander has equity in the property known as Glenelg in the sum of a little over $1,000,000. However, it was at this point that the plaintiff's evidence on the issue became somewhat unsatisfactory.
20. Exhibits 2, 3 and 4 were copies of caveats over the property.
21. Exhibit 3 was a caveat recording an interest in the New South Wales Rural Assistance Authority. The precise amount of the relevant debt was not subject to evidence. I was told from the bar table that the debt was approximately $35,000.
22. Exhibit 4 was a caveat recording the interest of Jane Lander. Jane Lander is Duncan Lander's ex-wife (or estranged wife) and her interest arises out of Family Court orders. The orders became Exhibit 6. Those orders demonstrate that Mr Lander is required to pay to Jane Lander the amount of $50,000 on 1 February in the years 2014, 2015, 2016, 2017, 2018, 2019 and 2020. Again, there was no evidence as to the precise status of this debt or compliance with this order. I was told from the bar table that the first three of those payments (2014, 2015 and 2016) had been made. I understood that the payment that fell due on 1 February 2017 had been made in part. The 2018 and 2019 payments have not been made and do not fall due until 1 February 2018 and 2019 respectively. Counsel was unable to tell me why the 1 February 2017 payment has not been made in full. I was told, again from the bar table, that the total amount of the debt to the wife subject of the caveat in Exhibit 4 was around $170,000.
23. The final caveat recorded an interest of Mr Lander's solicitors. They are named in the caveat as Eris Daniel Gleeson, Peter John Nevin Moffitt, Rina Van Ommeran, Andree Kate Rowntree and Vanessa Anne Gibson. Presumably they are the partners of the law firm representing him. Counsel was unable to say how much that caveat was said to cover in terms of legal fees or whether it related solely to the current litigation. That caveat, which was Exhibit 2, was recorded on the title on 21 July 2017. That is, the caveat was recorded just a week or so before the hearing of this application for security of costs.
24. While this material suggests that Mr Lander may have sufficient equity in the Glenelg property to satisfy any costs order made against the plaintiff, the evidence is far from watertight on that issue. Further, the steps that would need to be taken by the defendants, if it was successful and obtained a costs order, would likely result in significant delay. As counsel for both sides seem to agree, if the undertaking was secured by no more than an unregistered mortgage, the successful defendants seeking to enforce a costs order would simply have to "join the queue" to use the vernacular employed by counsel.
25. This evidence raises a number of questions about the extent to which a personal undertaking by Duncan Lander will provide the defendant's with any real security should they obtain an order for costs in their favour. In particular, the reasons he has not paid the money owed to the Rural Assistance Authority or the amount that fell due under the Family Court orders in February 2017 are obscure. The fact that his solicitors felt it necessary or prudent to register their interest by caveat over the property a week or so before this application was heard does not engender confidence that Duncan Lander could pay the costs of the other side if the plaintiff is ordered to do so. Having said that, I should make it clear that I accept unreservedly that what fell from counsel was precisely in accordance with his instructions. I should also say that based on those instructions, it appears that Mr Lander has substantial equity in the Glenelg property.
26. Counsel was invited to provide submissions as to the form of orders that might be made in the alternative to an order that money be paid into court or security be provided in the form of a bank guarantee. The submissions filed by the plaintiff ventured beyond that issue. I accept the defendants' submission that those submissions ought not to have been made (in the absence of leave or agreement). [1] However, the submissions were little more than a re-statement of the arguments put orally. The defendants took the opportunity to respond in its further written submissions. I have taken the further submissions into account.
27. As to the matter upon which additional submissions were sought, the plaintiff submitted that the following orders would provide sufficient security for costs: 1. "(1) ORDER that the plaintiff provide security, in the sum of [$sum determined by the Court up to $150,000.00)] by way of: 1. an undertaking by Duncan Lander to be personally liable for those costs; 2. such undertaking to be further secured by: 1. a registered mortgage over the property Glenelg; or 2. if the NAB does not consent to the lodgement of a registered mortgage in favour of the defendants over Glenelg within 21 days, an unregistered mortgage over Glenelg in favour of the defendants together with a caveat over Glenelg. 1. ORDER that the form of security in order 1 above be provided within 28 days. 2. ORDER that in the event the security is not provided within 28 days, the proceedings be thereafter stayed until such security is provided."
28. The plaintiff submitted that the amount of security offered ($150,000) is "generous" and that the amount covers "almost 100%" of the defendants' anticipated costs [2] and/or almost the entirety of the defendants' costs calculated on a party/party basis. The plaintiff submitted that the amount offered "offsets any concern about the ability to readily convert such security into cash". The defendants submitted that this was a "non sequitur" and that the amount of security offered "matters little unless it can be converted to cash".
29. The plaintiff also submitted that the order should require that security be provided in tranches. The defendants did not object to this course.
30. However, the defendants maintained that I should make what they submitted was the usual or traditional order for security for costs. That is, the security should be in the form of a bank guarantee or payment of cash into the court. The defendants submitted that the provision of a personal guarantee with an unregistered mortgage (or caveat) was cumbersome and provided no real security. In essence they submitted that, if Mr Lander has sufficient equity in the Glenelg property, there is no reason that he would not be able to obtain a bank guarantee or that the National Australia Bank would object to registering a second mortgage over the property. This was the approach adopted by McDougall J in Sharjade v Darwinia Estate & Anor [2006] NSWSC 708 at 41.
31. I have considered the evidence of the amount of costs already incurred and the amount anticipated to be incurred to the conclusion of the proceedings.
32. Having considered all of the above matters, as well as the nature of the plaintiff trust company and the number of beneficiaries that exist under the trust deed, I am satisfied that an order should be made. I am not satisfied that an undertaking with an unregistered mortgage provides sufficient security. This conclusion arises from the uncertainty surrounding the extent to which the property Glenelg is already encumbered and the existence of a number of caveats over those properties.
33. However, based on the evidence of the costs expended to this point and the anticipated costs, along with the delay in bringing the application, the amount of the order should be significantly less than that offered by the plaintiff, through its counsel and Mr Lander's undertaking. The reduction in the quantum of the order is balanced by the stricter security requirement.
34. Accordingly, I make the following orders: 1. (1) ORDER that the plaintiff provide security for the defendants' costs in the sum of $100,000. 2. (2) ORDER that this security be paid or secured in two tranches of $50,000 as follows: 1. The first tranche to be paid or secured within 28 days of these orders. 2. The second tranche to be paid or secured within 28 days after the fixture of the proceedings for trial. 1. (3) ORDER that the security be in one of the following forms: 1. Payment of those sums into Court; or 2. A bank guarantee in that sum; or 3. An undertaking by Duncan Lander to be personally liable for those costs, such guarantee to be secured by a registered mortgage over the property Glenelg. 1. (4) ORDER that, in the event the security is not provided within time stipulated by order (2), the proceedings be thereafter stayed until such security is provided. 2. (5) The plaintiff is to pay the defendants' costs of the motion. 3. (6) The matter is listed before the Registrar on 3 October 2017.