The Owners - Strata Plan 87265 v Saaib

The Owners Corporation's financial position

1. On 11 September 2018, some 21 months after the proceedings commenced, and after all but one of the Owners Corporation's expert statements were served, Mr Saaib, through his solicitor Mr Draybi, raised for the first time concerns about the Owners Corporation's financial position.
2. Mr Draybi wrote: "The two year anniversary of the commencement of these proceedings is fast approaching, that is 20 December. Despite this, the Plaintiff has neglected to finalise its evidence in a timely manner. Noting the lack of response to our email of 28 August 2018, the Plaintiff is even [sic] unable to even confirm whether or not their evidence is complete. This raises significant doubt about the Plaintiff's ability to adequately prosecute these proceedings. The Plaintiff's inability to adequately prosecute these proceedings further invokes fear as to the Plaintiff's ability to meet an adverse costs order. Noting the Plaintiff's delays, and the significant doubt about the Plaintiff's ability to prosecute these proceedings, we are instructed to make an application for security for our client's costs. We now require you to provide evidence from your client that it is able to both fund these lengthy and expensive proceedings and to pay our client's costs should your client be ultimately unsuccessful."
3. It turns out that the concerns expressed in that letter were well founded.
4. The Owners Corporation has a substantial net asset deficiency according to its most recent accounts. As at 30 September 2018, the Owners Corporation had a negative net asset position of some $618,000.
5. That is due in large part to the fact that the Owners Corporation has borrowed funds to conduct this litigation from Lannock Capital 2 Pty Ltd.
6. The Owners Corporation has a facility of $900,000 with Lannock, from which some $770,000 has been drawn down and used, for the most part, to fund this litigation.
7. Were a costs order to be made against the Owners Corporation it would be obliged, by s 81 of the Strata Schemes Management Act 2015 (NSW) to levy each lot owner for a contribution as it would otherwise be unable to meet that expense.
8. Such contributions would be payable by lot owners by instalments if the Owners Corporation so determined (s 81(5) of that Act) thus raising the possibility, if not the probability that the Owners Corporation could not raise funds to meet any costs order without delay.
9. In those circumstances Mr Kidd SC, who appeared with Mr Ahmed for the Owners Corporation, accepted that the threshold test referred to in Uniform Civil Procedure Rules 2005 (NSW) r 42.21(1)(d), that there is reason to believe that the Owners Corporation would be unable to pay Mr Saaib's costs, was satisfied.
10. Nonetheless, Mr Kidd submitted that security for costs should not be ordered for a number of reasons.

Those standing to benefit from the litigation

1. The Owners Corporation is bringing these proceedings for the benefit of the lot owners. Were the Owners Corporation to be unsuccessful, and were a costs order to be made in favour of Mr Saaib against it, the Owners Corporation would be entitled to recover those costs from lot owners by, first, making a levy under s 81(4) of the Strata Schemes Management Act and, if need be, recovering any unpaid contributions from each lot owner by one or other of the means specified in s 86 of that Act. There may be some delay. But it is likely that, eventually, the lot owners would have to meet their share of the costs burden.
2. This is thus not a case where those who stand to benefit from the fruits of this litigation can, to adopt Mr Kidd's expression, "shirk the burden" of an adverse result. The lot owners who "stand behind" the Owners Corporation will not escape bearing the burden of the litigation from which they stand to benefit: cf Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 at [83] (Austin J), cited as authority in Ballard v Brookfield Australia Investments Ltd [2013] NSWCA 82 at [49] (Ward JA).

Delay

1. There has been delay in bringing this application. As recently stated in the Court of Appeal, the relative significance of any delay will vary according to the nature, extent and cause of the delay, as well as the facts and overall justice of the case: PPK Willoughby Pty Ltd v Baird [2019] NSWCA 48 at [11] (Bell P and Simpson AJA).
2. The application in this case was brought almost two years after the proceedings were commenced and after the Owners Corporation has spent something in the order of $770,000 prosecuting its case.
3. The explanation for the delay is set out in Mr Draybi's letter of 11 September 2018 to which I have referred.
4. I have no reason to doubt that the matters set forth in that letter constitute the reason that Mr Saaib and his solicitor then felt the need to make an enquiry about the Owners Corporation's financial position. I do not accept Mr Kidd's submission that those matters do not provide a reasonable basis to have such a concern. By that date, the Owners Corporation had been in breach of directions as to serving its evidence, such that a guillotine order had been made. In any event, Mr Draybi's apprehension about the Owners Corporation's financial position has been proven to be justified.
5. It is true that the delay has deprived the Owners Corporation of the opportunity to consider, earlier in the proceedings, and perhaps before it incurred much of the expense for conducting the case to date, whether it was prepared to continue the proceedings in the face of an order for security for costs.
6. I can only speculate about what might have happened, had the application for security for costs been made earlier.
7. But, now that the application has been made, the real question is whether making an order now carries with it the risk that the costs that the Owners Corporation has incurred will be wasted: see, for example, Litmus Australia Pty Ltd (in liq) v Canty [2007] NSWSC 670; (2007) 25 ACLC 1141 at [26] (White J).
8. That will only be so if the making of an order for security will give rise to a risk that the proceedings will be stultified: see, for example, Australian Worldwide Pty Ltd v AW Exports Pty Ltd [2018] NSWSC 1632 at [58] (Parker J) citing Rickard Constructions Pty Ltd v Allianz Australia Insurance Ltd [2002] NSWSC 1162 at [17] and Rhema Ventures Pty Ltd v Stenders [1993] 2 Qd R 326 at 332-333.

Stultification

1. It is for the Owners Corporation to show that the making of an order for security will stultify the proceedings.
2. In Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4; [1984] FCA 29 at 8-9, Sheppard, Morling and Neaves JJ said in a passage which has been cited on countless occasions in applications such as this: "In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts."
3. More recently, in Australian Equity Investors, An Arizona Limited Partnership v Colliers International (NSW) Pty Ltd [2012] FCAFC 57, Jacobson, Besanko and Perram JJ said at [30]: "The passage in Bell Wholesale is not to be read like a statute and the discretion thereby ossified. … The principle at play is a simple one: those who stand to share the benefits of litigation cannot shirk its burdens. We do not think the Court in Bell Wholesale intended to say any more than that. … This is not to say that in every case where stifling is said to be the result of an order for security that the position of those benefitted by the litigation needs to be proved by an applicant. Each case depends on its own facts and an assessment of what is reasonable in the circumstances…".
4. I see nothing in those passages doubting the correctness of the statement in Bell Wholesale that it is for a party in the position of the Owners Corporation here to "prove the necessary facts" to show the risk of stultification; as opposed to proving the position of "those benefited by the litigation" which is the issue to which the remarks in Australian Equity were directed.
5. The evidence adduced by the Owners Corporation directed to stultification is from Ms Leanne Walton, the treasurer of the strata committee and the owner of one of the lots.
6. Ms Walton said: "14. If an order was made to the effect that these proceedings be stayed unless the Plaintiff provided security for the Defendant's costs in an amount in the order of $300,000, it would be necessary for the Plaintiff to raise additional funds in the amount of approximately $300,000. 15. For that to happen, it would be necessary for the Strata Committee to convene a meeting of Lot owners for them to decide whether they wish to seek to raise additional funds of $300,000 to provide security for the Defendant's costs. I cannot predict what the Lot owners would decide. … 16. If the Lot owners did decide to seek to raise the additional $300,000 funds, I believe the Strata Committee would seek to raise those funds by applying to Lannock to increase the limit of the Loan Facility by a further $300,000. I cannot predict whether Lannock would agree to increase the Loan Facility limit by $300,000. I believe that there is a risk Lannock may not increase the Loan Facility given that the Plaintiff has already incurred a loan liability to Lannock of approximately $770,000 and the remaining available credit is earmarked for us in funding the Plaintiff's own costs of the proceedings. Located at page 19 of exhibit LW-2 is an email from Lannock to Mills Oakley sent on 28 February 2019 at 12:51pm recording that Lannock would need to assess any application for an increased facility to be assured that it met Lannock's lending parameters."
7. Ms Walton's evidence reveals that the Owners Corporation has drawn down some $770,000 of the $900,000 Lannock facility and needs the balance of $130,000 to continue funding this litigation.
8. It also appears from Ms Walton's evidence that the only means by which the lot owners are currently considering meeting a possible order for security for costs is by seeking further funding from Lannock.
9. There is no evidence as to the likelihood of Lannock agreeing to make further funds available. All that Lannock has said, in an email sent to the Owners Corporation on 28 February 2019, is that it would consider any further application for funds.
10. Mr Kidd submitted that there is a risk that Lannock would not make any further advances. I accept that is so. The matter is simply unknowable at this stage.
11. But there is another avenue available to the Owners Corporation, and that is to make a levy on each of the lot owners. They are the parties that stand to benefit from the litigation. The amount of security sought by Mr Saaib is a total of some $270,000. If security were to be ordered in that amount each lot owner would have to contribute about $25,000. There is no evidence as to whether the lot owners could or would make such a contribution. More to the point, there was no evidence that they could not.
12. Mr Kidd raised the possibility of the lot owners, faced with an order directed to the Owners Corporation to provide security, deciding not to prosecute the proceedings further.
13. In PPK Willoughby at [16], the Court of Appeal observed that a plaintiff need not prove exactly what it would have done had an application for security for costs been made earlier, though proving that it would have not gone ahead with the proceedings had it been made earlier would be a very powerful consideration.
14. But here, there is no evidence that the Owners Corporation will not proceed if it were ordered to provide security for costs. I rejected an inadmissible speculation Ms Walton purported to make about this in her affidavit. Abandoning the proceedings now would, in substance, involve the lot owners accepting that their investment, by the Owners Corporation's borrowing from Lannock, was in effect lost and accepting joint responsibility to fund the Owners Corporation's repayment of that loan. Without evidence from the lot owners that they would be prepared to make that sacrifice, I am not prepared to infer that they would. On the contrary, it seems to me probable that they would not.
15. Overall, I am not satisfied that the making of an order for security would stifle the proceedings. In the absence of evidence from the lot owners that they could not, together, fund provision of security, I am not satisfied that there is a sensible and realistic risk that the litigation will be stifled.

Is the Owners Corporation's impecuniosity attributable to Mr Saaib's conduct?

1. A factor to which the Court may have regard when considering whether to make an order for security for costs is whether "the plaintiff's impecuniosity is attributable to the defendant's conduct": UCPR r 42.21(1A)(d).
2. It is for the Owners Corporation to establish this matter. Discharging that onus requires demonstration of a real causal connection between Mr Saaib's conduct and the Owners Corporation's current impecuniosity. The defendant's conduct must be "the material contributor to or cause of the [Owners Corporation's] impecuniosity": G E Dal Pont, Law of Costs (1st ed 2003, LexisNexis Butterworths) at [29.96] (at [29.101] in 3rd ed, 2013), cited with approval in Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276 at [95] (McClellan CJ at CL, with Mason P agreeing).
3. This factor usually requires consideration of whether the matters complained of in the proceedings caused the plaintiff to be, when the proceedings were commenced, without means to meet a costs order.
4. Had the Owners Corporation borrowed the funds necessary to remedy the alleged defects in the common property, caused the property to be repaired, and then sued Mr Saaib to recover, as damages, the amount so expended, and had such borrowings left the Owners Corporation in the impecunious state it now finds itself, it could hardly be doubted that the Owners Corporation's impecuniosity was attributable to Mr Saaib's conduct.
5. I do not see how the position is different where, as has happened here, the Owners Corporation has not used the funds to repair the alleged breaches (perhaps because of the costs involved) but, rather, has used the funds to conduct the litigation.
6. The only reason the Owners Corporation's financial position is parlous, is its borrowing to fund the litigation.
7. I was not taken to any analogous case on this point, nor has my own research revealed one.

Conclusion as to whether security should be ordered

1. The matter is finely balanced.
2. Some matters are neutral.
3. For example, Mr Saaib accepts that the Owners Corporation has an arguable case against him. Further, as I have explained, those who stand to benefit from this litigation are exposed, albeit indirectly, to the burden of a costs order. If Mr Saaib is successful, and obtains a costs order, is seems likely that he will, perhaps after some delay, recover those costs.
4. I do not find delay to be the decisive factor.
5. However, my conclusion is that the justice of the case warrants the conclusion that I should not order security.
6. The factor which persuades me not to make an order for security is that the Owners Corporation's financial position is the result of the conduct of which it complains in the proceedings in the sense that it is the result of borrowings the Owners Corporation has made to fund the litigation.
7. It would not be just, in those circumstances, to make the order sought by Mr Saaib.

Quantum

1. Having reached this conclusion, it is not necessary to deal with the quantum of any order.
2. However, I will deal with that question, albeit briefly.
3. Mr Saaib seeks an order that the Owners Corporation provide security for costs in the order of $270,000 comprising some $60,000 for costs incurred to date and some $210,000 for future costs.
4. I would not have been inclined to make an order for past costs. The delay in bringing this application is a factor militating against an order for past costs. Further, some costs have been incurred by Mr Saaib in relation to his unsuccessful application to have determined separately the question of whether he was the builder. I understand that an order for the costs of that application has already been made.
5. Mr Draybi's estimate as to future costs is at a very high level and does not contain the detailed analysis usually expected in applications such as this. However, as Mr Lawrance, who appears with Mr Fernandes for Mr Saaib pointed out, the Owners Corporation's solicitor has advised it that its future costs are likely to be in the order of $200,000; a figure in the same order as that predicted by Mr Draybi.
6. Accordingly, had I ordered security for costs, it would have been in such an amount.

Conclusion

1. Mr Saaib's notice of motion of 12 November 2018 is dismissed with costs.

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