Trojan Marketing & Consultants Pty Limited v Kirela Pty Limited

Supreme Court of NSW|2018-10-26|Before: Rees J

Solicitors: David Legal - First and Second Plaintiffs Baker McKenzie - Defendant File Number(s): 2017/293657

Judgment

HER HONOUR: This is an application to review the decision of a registrar to order security for costs. The applicants/plaintiffs seek an order that the motion for security for costs be dismissed with costs. The respondent/defendant seeks instead an order that the review application be dismissed with costs payable forthwith.

It can be seen from the financial statements that both companies were profitable and had an excess of assets over liabilities. The different nature of the business conducted by each company is also evident. It appears from these financial statements and the National Australia Bank's documents referred to earlier that Trojan entered into the finance arrangements in respect of the supermarket business operated by Mannellis IGA, and its indebtedness appears to be reflected in an inter-company loan between Trojan and Mannellis IGA.
In November 2016, January 2017 and February 2017, the plaintiffs' account is that the problem with water leaks, flooding and contamination of the premises continued. In January 2017, a video was taken of the roof above the deli area. In May 2017, the tenant failed to pay the whole of the rent owing for that month and thereafter remained in default. In June 2017, water leakage is said to have occurred on 8, 15 and 22 June 2017, with the tenants demanding repairs on six occasions that month.
As at 30 June 2017, the financial statements revealed the following picture: 2017 Trojan Mannellis IGA INCOME Rent received $249,543 $7,404,705 (down $1,928,650) Professional fees $1,865,175 $17,945 Sales Other income EXPENSES $7,633,451 (up $860,186) Cost of goods sold $648,824 $1,707,324 Other expenses PROFIT BEFORE INCOME TAX $1,465,894 (up $548,113) ($1,918,125) (down $2,839,126) NON-CURRENT ASSETS $5,850,467 Loan - Other $393,622 $3,912,470 Plant & Equipment, Office Furniture (less depreciation) LIABILITIES $1,499,935 Bank overdraft $2,261,386 $4,592,555 Loans - Unsecured NET EQUITY $2,959,947 (up $1,465,893) ($1,217,750) (down $1,918,125)

It can be seen that, by 30 June 2017, Mannellis IGA's financial position had deteriorated substantially by a reduction in profit of almost $3 million, resulting in a loss overall of $1.9 million for the year with a commensurate reduction in net equity to a deficiency of assets over liabilities of $1.2 million. Trojan's financial position improved in the same period as did its net equity.
In July and August 2017, the plaintiffs say that the water leakage problems continued, as did their demand for repairs. On 28 September 2017, the plaintiffs commenced these proceedings seeking damages for breach of contract, nuisance and negligence and an injunction to restrain Kirela from causing nuisance by: 1. permitting waste water to flow into the premises; 2. permitting waste water, grease and other filth to back charge into the premises from the grease trap located outside the premises near to the northern boundary of the premises; or 3. otherwise interfering with the plaintiffs' quiet enjoyment of the premises.
The loss and damage said to have been suffered by the plaintiffs included damage to the fixtures, fittings and stock due to contamination estimated in the order of $522,800 plus perishable stock in the order of $300,000; loss of profit from interruption to the business of the supermarket, reduction of turnover and increased cost of working estimated in the order of $5.148 million, future economic loss, diminution in the value and goodwill of the supermarket business estimated to be $3 million and cleaning costs.
On 29 September 2017, the plaintiffs say that the water leaks continued and they demanded repair. According to the plaintiffs, Seph Glew of Kirela accused Peter Sleiman of sabotaging the drains and grease traps so as to cause the leaks and back charging, said that the landlord had no intention of doing anything to prevent the leaks or back charging or repairing the premises, threatened to cut off the electricity to the premises on 5 October 2017, threatened to lock the plaintiffs out of the premises on 15 October 2017 and made various other threatening remarks.
On 3 October 2017, the plaintiffs alleged that the premises flooded again. On 4 October 2017 at 1.06pm, the plaintiffs' solicitor sent a letter to the landlord accepting the landlord's wrongful repudiation of the lease. At 2.00pm, the plaintiffs say that Kirela boarded up the premises whilst 20 people remained inside the premises; refused to permit the plaintiffs' staff, contractors and other people to leave other than on terms that they exited through a rear door, one by one, as and when permitted to do so, and provided that they did not take anything with them; and took possession of the contents of the premises including plant and equipment and stock owned by the plaintiffs, goods and chattels on lease from National Australia Bank and property owned by the newsagency.
Mannellis IGA points out that as at 30 June 2017 it had stock on hand of $374,200. Further, the property improvements were recorded in the balance sheet at $4,145,956 less depreciation. These two items were, the plaintiffs say, converted by Kirela when it took possession of the supermarket premises. I note that clause 22.2 of the Lease entitles the landlord to re-enter and take possession of the premises if the tenant is in default of the Lease. The Lease is silent on the position if the landlord is in default of the Lease, which is an outcome for which the plaintiffs contend in the substantive proceedings.
On 4 and 5 October 2017, further photos and video were taken by the plaintiffs, apparently of water and sewerage seepage into the street. On 12 October 2017, the plaintiffs amended their statement of claim to reflect recent events and to also seek a declaration that the lease had been validly and effectively terminated by their acceptance of the defendant's wrongful repudiation of the lease.
On 7 November 2017, Kirela's solicitor wrote querying Mannellis IGA's standing in the proceedings given that it was not the lessee and also asked the plaintiffs to demonstrate that they had sufficient assets to satisfy a costs order or alternatively, agree to provide security for costs. On 19 December 2017, Kirela's solicitors sent a compendious eleven page request for further and better particulars of the Amended Statement of Claim and followed up their request for security for costs.
In February 2018, the plaintiffs' solicitor provided proposed Short Minutes of Order in which the plaintiffs agreed to provide a proposed amended pleading for Kirela's consideration, to which Kirela's solicitor declined to agree until the issue of security for costs was addressed. On 19 February 2018, the plaintiffs' solicitor forwarded the financial statement for Trojan for the years ended 30 June 2016 (which included the figures for 30 June 2015) and 30 June 2017, noting that Mannellis IGA's financial statements had not yet been completed. In respect of the request for security for costs, the plaintiffs' solicitors replied: Trojan is easily able to and is prepared to meet any order for costs against Mannellis. Less there be any doubt, Mannellis, is the entity whose retail business was ruined by your client's failure to stop water leaks from its overhead drainage system. Trojan is the lessor of the equipment that your client converted to its own use when it locked each of our clients out of the premises.
Kirela's solicitors were unmoved. Further lengthy letters ensued from Kirela's solicitors in respect of asserted pleading deficiencies. Notwithstanding the apparently healthy financial position of Trojan, Kirela's solicitors suggested that the financial statements did nothing to allay their client's concerns. The plaintiffs filed a motion seeking leave to amend their pleading to address Kirela's complaints and Kirela continued to press for security for costs. On 3 May 2018, the plaintiffs' solicitors advised that their clients were in the process of obtaining updated financial statements, did not accept Kirela's analysis of Trojan's financial statements and added: In addition to the substantial assets disclosed in the financial statements that have already been provided, we note, and as is pleaded, your client is currently distraining substantial chattels that belong to the plaintiffs … Any impecuniosity of the plaintiffs can materially be contributed to your client's conduct, as pleaded in the statement of claim, which materially affected our client's supermarket business and its takings, ultimately causing the cessation of that business.
In June 2018, Kirela issued notices to produce to the plaintiffs seeking financial statements, being either signed or, if not signed, final, for the financial years ended 30 June 2015, 2016 and 2017. Kirela filed a motion for security for costs in the amount of $205,834 being Kirela's costs to date of $47,662 and its costs to the end of three day trial estimated to be $173,144. In an affidavit in support of the motion, Kirela's solicitor Mr McCredie deposed that Kirela intended to file a Cross-Claim "including for unpaid rent".
Mr McCredie, a partner of Baker McKenzie, estimated Kirela's costs, using hourly rates of $785 per hour plus GST for a partner and $640 per hour plus GST for a senior associate with one-third of the work to be completed by a partner and two-thirds by a senior associate. From commencement of the proceedings including reviewing the Statement of Claim and subsequent amendments of that pleading, corresponding regarding security for costs and preparing the security for costs application, Baker McKenzie fees were $46,900 plus GST, which Baker McKenzie has discounted by forty per cent and added counsel's fees without discount, making a total of costs incurred to 23 May 2018 of $32,690. Baker McKenzie estimated that its costs of taking the matter to the end of a hearing would total some $151,490, $52,250 for counsel's fees and $30,000 for expert's fees. Applying a forty per cent discount to Baker McKenzie's fees only, total fees for the second phase are estimated at $173,144. Amongst these fees, allowance was made for the security for costs application and drafting a cross-claim. Neither appears to me to be appropriate to be included in these figures. Mr McCredie considered his estimate to be conservative.
In response, the plaintiffs' solicitor, Mr David, put on an affidavit deposing that the financial statements for Trojan for the year ended 30 June 2018 were in the process of being finalised, whilst the financial statements for 2016 (which included the figures for 2015) and 2017 had been provided. In his affidavit, Mr David outlined the nature of the proceedings and exhibited the videos and photographs which, according to Peter Sleiman, had been taken by the plaintiffs' staff in the course of the plaintiffs' business using their mobile phones. The photos were said to be of the drainpipes in the supermarket. Mr David deposed to the events that took place at the end of the lease and noted that Trojan was prepared to undertake to meet any adverse costs order made against Mannellis IGA. Mr David deposed to the value of the items that were damaged, the cost of the fitout of the supermarket, the perishable stock totalling some $300,000 which was in the supermarket when Kirela retook possession and the value of the stock and equipment left behind as well as Trojan's continuing financial liabilities to the National Australia Bank incurred for the purposes of conducting the supermarket business.
The plaintiffs accepted that there was reason to believe that the plaintiffs would be unable to pay the costs of Kirela if ordered to do so, thereby satisfying the requirements of rule 42.21(1)(d) of the Uniform Civil Procedure Rules 2005. As such, the question for determination by the Registrar was whether the Court should exercise its discretion to order security, in respect of which rule 42.21(1A) of the Uniform Civil Procedure Rules provides: In determining whether it is appropriate to make an order that a plaintiff … give security for costs, the court may have regards to the following matters and such other matters as it considers relevant: (a) the prospects of success or merits of the proceedings, (b) the genuineness of the proceedings, (c) the impecuniosity of the plaintiff, (d) whether the plaintiff's impecuniosity is attributable to the defendant's conduct, (e) whether the plaintiff is effectively in the position of a defendant, (f) whether an order for security for costs would stifle the proceedings, … (j) the costs of the proceedings, (k) whether the security sought is proportionate to the importance and complexity of the subject matter in dispute, (l) the timing of the application for security for costs, …

Submissions made to the Registrar

It was apparent from the affidavits and detailed written submissions filed by the parties that the motion for security for costs was being advanced and resisted on three bases. I have set out the submissions which were made to the Registrar in detail as the same submissions were advanced on the review.
First, Kirela was strongly disparaging of the plaintiffs' claim and pleading, describing Mannellis IGA's claim as "nebulous and problematic" and the proceedings as not genuine. Kirela pointed to the series of amended pleadings, although this criticism was somewhat unfair as the amendments were prompted by Kirela's solicitor's detailed correspondence on the subject. Kirela submitted that the veracity of the plaintiffs' claim was diminished by the fact that proceedings were commenced after the plaintiffs were already in rental arrears. As such, Kirela submitted that the matters in rule 42.21(1A)(a) and (b) of the Uniform Civil Procedure Rules were relevant, being the prospect of success or merits of the proceedings and genuineness of the proceedings. Kirela submitted that the plaintiffs' claim for significant damages was unlikely to be able to be proved by the plaintiffs in circumstances where they had not produced financial statements in response to Kirela's repeated requests. Kirela made its position clear to the Registrar: the plaintiffs' claim was unlikely to succeed and lacked merit and this should weigh in favour of an order for security for costs being made.
Conversely, Trojan and Mannellis IGA submitted that the matters referred to in rule 42.21(1A)(a) and (b) favoured the plaintiffs having regard to the contemporaneous photographic and video evidence. The plaintiffs relied on Live Board Holdings Ltd v Cody Live Pty Ltd [2017] NSWCA 302, where the Court (constituted by Bathurst CJ, Leeming JA and Barrett AJA), at [97]-[102], stated that, on an application for security, the court was entitled to have regard to the prospects of success or merits of the proceedings; and earlier authorities - which stood for the proposition that the "merits" factor was neutral if a claim was not frivolous - placed a gloss on rule 42.21(1A)(a). The plaintiffs set out the key aspects of their Honours' conclusion at [98]-[99]: 98 That constrained approach does not reflect the broad discretion conferred by the rules. UCPR r 42.21(1A)(a) entitles the court in terms to have regard to "the prospects of success or merits of the proceedings". It is true that in many cases it will not be possible to form a meaningful view as to the strength or weakness of a plaintiff's claim for the purposes of an application for security for costs. Such applications are ordinarily brought before pleadings are closed and evidence filed. But that does not mean that, for example, there may never be a case in which a court can be satisfied that an impecunious corporate plaintiff has prima facie a very strong case, such as to inform the exercise of discretion on an application for security for costs. The starting point in the exercise of discretion is the legislation conferring the power, not some gloss upon it. 99 The authorities on which the primary judge relied for the narrower proposition that the strength of a claim was neutral so long as it was advanced bona fide and gave rise to real issues should not be understood as denying an ability on the part of the Court, in an appropriate case, of relying on its assessment of the strength or weakness of the case, in accordance with UCPR r 42.21(1A)(a). In Fiduciary v Morningstar Research [2004] NSWSC 664 at [37] Austin J was speaking of the particular facts of the claim before him, and accepted what appears to have been an uncontroversial submission in the particular application before him that the merits of the underlying claims should be regarded as neutral. That is particularly plain from the closing sentence in [39]. ("In the present case, the merits of the Rich interests' case against the Morningstar interests are a neutral factor".)
The plaintiffs accepted in their written submissions that it was not desirable for any final conclusions as to disputed factual findings to be made at such an interlocutory stage but, having said that, submitted that the evidence as to the nature of the leaks in the photographs and videos warranted the conclusion that this was in the rare category of case where it is "possible to form a meaningful view as to the strength or weakness of a plaintiff's claim for the purposes of an application for security for costs", and that the appropriate conclusion was that plaintiffs have "prima facie a very strong case" that the leaks occurred to the extent asserted by the plaintiffs (Live Board Holdings at [98]). The plaintiffs submitted that the fact that the plaintiffs had a prima facie strong case weighed against an order for security for costs. As such, the merits of the plaintiffs' claim were at the forefront of the contest.
Second, Kirela pointed to the unpaid rent, the financial position of the Trojan and Mannellis IGA as known, and its efforts to obtain further financial information. Kirela pointed to the absence of financial statements for Mannellis IGA, notwithstanding repeated requests. In respect of Mannellis IGA at least, this point was well taken. In response, the plaintiffs accepted that Mannellis IGA was impecunious but said that its impecuniosity was attributable to the conduct of Kirela when it locked the plaintiffs out of the premises and in doing so converted the stock, fittings and fixtures. Both parties cited Jazabas Pty Ltd v Haddad [2007] NSWCA 291 in support of this submission. In that case, McClellan CJ at CL (with whom Mason P agreed) said at [94]-[95]: 94 The claimants carried the onus of establishing both the adequacy of their financial position before their dealings with the opponents and that the opponents' actions have caused or at least materially contributed to the claimants' inability to meet an order for security for costs (see Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 at [100]). 95 In "Law of Costs", G E Dal Pont says: "[T]he plaintiff must be able to support the allegation with relatively straightforward and unambiguous evidence of a fairly compelling nature, because otherwise the hearing of the issue of security might become a trial within a trial. For this reason, it is not enough that the defendant's conduct is merely a contributing factor - it must be the material contributor to or cause of the plaintiff's impecuniosity." (at [29.96] emphasis added)…
Kirela submitted that, given the absence of financial information, Mannellis IGA could not prove that its financial position was adequate before it met with misfortune at the hands of Kirela, or that Kirela's actions materially contributed to its impecuniosity. The plaintiffs responded by pointing to the fact, which appeared not to be in dispute, that Kirela had taken possession of the supermarket and all that was within it which, the plaintiffs submitted, pointing to the affidavits and exhibits filed, comprised a fitout which cost some $4.5 million, perishable stock worth some $300,000 and a number of items in respect of which the plaintiffs had ongoing financial obligations to the National Australia Bank. The plaintiffs submitted that the evidence was sufficient to show that Mannellis IGA owned assets prior to supermarket being re-taken by Kirela, and a conversion of those assets materially contributed to Mannellis IGA's impecuniosity.
Third, the plaintiffs noted that Kirela anticipated filing a Cross-Claim and submitted that it would likely require determination of the same matters as the plaintiffs' claim. The plaintiffs expected that Kirela would say that the plaintiffs will not be entitled to set off any damages awarded against the cross claim by reason of Clause 25.3 of the lease which provides: The tenant must pay the landlord all money the tenant must pay to the landlord under this lease on time and in full without deduction or set-off.
The plaintiffs submitted that this only entitled Kirela to prevent any set off for amounts payable "under this lease" which would not extend to other matters potentially the subject of a Cross-Claim including damages for loss of future rent by reason of termination of the lease. Further, in order to determine whether the plaintiffs were entitled to terminate the lease in the way they did, the court would need to consider the same facts relevant to the plaintiffs' claim, being the problem with the water leaks and the extent to which those leaks caused damage. The plaintiffs submitted that the same or similar evidence would be advanced in determining the Cross-Claim as on the plaintiffs' claims. The plaintiffs relied on Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd (Administrator Appointed) [1999] NSWCA 16 at [15], where Sheppard AJA (with whom Mason P and Handley JA agreed) referred to the situation where there is overlap between a plaintiff's claims and a Cross-Claim as a "very important consideration", stating: … His Honour then came to the question whether substantially the same facts were likely to be canvassed in determining the action and the cross-action. Rolfe J began his discussion of this matter by saying: "In circumstances where the claim and the cross-claim arise out of the same, or essentially the same, factual matrix this, in my opinion, is a very important consideration. It has been frequently and consistently said by Judges sitting in this Division that an order for security will not generally be made in such circumstances, in the exercise of the Court's discretion. It would, in my view, be quite wrong to preclude a party from litigating matters by way of a defence to a cross-claim merely because that party has been the initial institutor of the proceedings. The conduct of the other party may have forced the allegedly impecunious party to take the litigious initiative, whilst not constituting misconduct. Put simply if [Concrete] seeks to recover any part of the debt the issues raised by Dalma in its claim would be available to it as a defence, and there has never been any suggestion that a party could be precluded from defending proceedings, where the defence is bona fide, by reason of impecuniosity. It is, therefore, a somewhat arid exercise to be considering an application for security for costs if the plaintiff can be cast in the role of a defendant and can litigate the very matters the subject of its claim by way of defence."
In finding that Rolfe J was not in error in refusing security, his Honour went on to say the following at [24]: During the oral argument which took place on the hearing of this matter, there was discussion about the significance of this matter. Neither counsel seemed anxious to come to grips with the reality of the true nature of the case. They appeared to be concentrating on what I would regard as a comparatively minor question concerning the meaning and effect of the indemnity. But as Rolfe J said in the paragraphs from his judgment which I have quoted, the fact that a claim and a cross-claim arise out of the same, or essentially the same, factual matrix is a very important consideration. He added that it would be quite wrong to preclude a party from litigating matters by way of defence to a cross-claim merely because that party was the initial institutor of the proceedings. I entirely agree with what Rolfe J has said. He concluded this part of his judgment by saying that it was a somewhat arid exercise to be considering an application for security for costs if the plaintiff could be cast in the role of a defendant and could litigate the very matters the subject of its claim by way of defence. Plainly he would have taken a different view if there had been an undertaking given on behalf of Concrete not to prosecute its cross-claim. One can readily understand the reasons for this but no such undertaking has been given.
The plaintiffs submitted that these principles were engaged, and favoured a conclusion that security for costs should not be ordered.

Hearing before the Registrar

On 21 August 2018, the Registrar heard Kirela's motion for security for costs. Perhaps surprisingly, Kirela made extensive objections to the plaintiffs' affidavits which sought to establish the merit of the plaintiffs' claim. The evidence was said to be irrelevant to the question which the Registrar had to deal with. This was a curious objection in circumstances where both parties pointed to the merits of the claim as favouring their respective positions. The plaintiffs' evidence clearly met the requirements of relevance under section 55 of the Evidence Act 1995 (NSW) and was further identified as a factor - indeed the first mentioned factor - which the Court could take into account when exercising its discretion under rule 42.21(1A). Kirela submitted that the merit of the proceedings was a neutral factor despite what Leeming JA said in Live Board Holdings. The time to make this submission was after relevant evidence had been admitted, not in objection to the evidence being admitted.
The plaintiffs submitted that the merits of their claim were relevant because, if the plaintiffs could establish with evidence that they had a strong case, then this weighed against an order for security for costs. This submission was clearly correct. The plaintiffs sought to play two short videos of a combined duration of 48 seconds. Counsel for Kirela submitted that he had seen the videos, adding, "It just shows water coming through the ceiling. It doesn't tell you when it happens, it doesn't tell you where. It looks like a shop. I don't know who took the videos." Kirela submitted that it had not been able to test the video: "We don't know if there is someone standing on top of the roof pouring - I mean, I am not casting aspersions…". Given that the affidavit of the plaintiffs' solicitor addressed the provenance of the videos and what the videos and photographs depicted, the objection effectively suggested that the evidence of the solicitor should not be accepted. So far as I can see, there was no basis for such a suggestion. The Registrar was persuaded by Kirela's submission and rejected the photographs and videos.
Kirela further objected to the plaintiffs' evidence as to Kirela retaking possession of the supermarket and its contents on the basis that it was misleading having regard to the fact that, as pleaded, the plaintiffs had already terminated the Lease before Kirela took possession. Having reviewed the pleading and the affidavit, I do not think this objection was well taken, in circumstances where the whole pleading, and every iteration of the pleading, was already in evidence, having been tendered by Kirela without objection. It was not incumbent on the plaintiffs to prove by affidavit every paragraph of the statement of claim on the motion of security, but rather those parts of the plaintiffs' claim considered relevant to the motion. The Registrar accepted Kirela's submission and rejected the paragraph. Likewise, Kirela objected to the plaintiffs' evidence as to the value of equipment that was effectively retained by Kirela when it took possession of the supermarket. The Registrar admitted this evidence subject to weight, which I take to mean that the evidence was admitted but the Registrar did not consider that the material had significant probative value to the matters requiring consideration.
Kirela submitted that the Registrar was not able to assess whether, in truth, the plaintiffs' case was strong because there was no defence. That can hardly be a problem attributed to the plaintiffs. Kirela submitted that it was too early for the Court to assess the strength of the plaintiffs' claim. Kirela then proceeded to submit that the plaintiffs' claim was not the strongest claim and referred to the number of amendments to the Statement of Claim. Again, this criticism was somewhat unfair as Kirela's solicitor engaged in substantial and detailed correspondence with the plaintiffs about their pleading, including on one occasion requesting eleven pages of further and better particulars, a request which would have been rejected out of hand in some specialist lists in this Court.
Counsel for the plaintiffs accepted that, on the evidence before the Registrar, the merits of the case were a neutral factor, and he could not point to any evidence that brought the case out of the ordinary. This is probably not surprising in the circumstances where Kirela had successfully objected to that evidence. The plaintiffs accepted there was scant evidence that Mannellis IGA's impecuniosity was caused by Kirela, in the absence of financial statements which showed the 'before' and 'after' picture.
As the Registrar's thinking became apparent to the parties, being to order security for costs, further submissions and discussion took place between the Registrar and the parties as to the appropriate amount of security for costs and the tranches in which it should be ordered. In the absence of a Cross-Claim, the Registrar considered that the extent to which the security for costs related to activities which might also relate to the Cross-Claim were somewhat speculative. The Registrar dealt with this difficulty by ordering that the security for costs be provided in tranches. The Registrar ordered the plaintiffs to provide security in the amount of $180,000 in tranches, being $45,000 within 28 days, $63,000 within 28 days of Kirela filing its defence and any cross-claim and $72,000 28 days before the hearing. The plaintiffs were also ordered to pay the costs of the Motion.
On 12 September 2018, the plaintiffs filed a Motion seeking a review of the Registrar's decision.

When should a Registrar's decision be reviewed?

Under rule 49.19 of the Uniform Civil Procedure Rules, the court may review a Registrar's decision "and make such order, by way of confirmation, variation, discharge or otherwise, as the court thinks fit". The parties agreed that the relevant principles for the exercise of this discretion were set out by Hodgson JA (with whom Ipp JA agreed) in Tomko v Palatsy (No 2) (2007) 71 NSWLR 61, [2007] NSWCA 369. At [5]-[10]: 5 I agree that the view expressed by Basten JA in Pioneer Park Pty. Limited (In Liquidation) v. Australia & New Zealand Banking Group Limited [2007] NSWCA 344, on the basis of limited argument, that the review of a registrar's decision with respect to an order for security for costs is constrained by the principles stated in House v. The King (1936) 55 CLR 499, is not strictly correct. 6 I agree that a review of a decision of a registrar is not an appeal, subject to s.75A of the Supreme Court Act; and that in such a review a court must exercise its own discretion. 7 In my opinion, this discretion extends to a discretion as to whether, and if so how, to intervene; and in my opinion, there is an onus on a person seeking to have a court set aside or vary a registrar's decision to make out a case that the court, in the interests of justice, should exercise its discretion to do so. 8 In the case of a decision on practice or procedure, this will normally require at least demonstration of an error of law, or a House v. The King error, or a material change of circumstances, or evidence satisfying the strict requirements for fresh evidence. Even then, a court may not think that the interests of justice require intervention. This could be so, for example, if the error of law is a deficiency of reasons and the result is on its face not an unreasonable one. 9 In the case of a decision which finally determines a party's rights, or which (albeit one of practice or procedure) has a decisive impact on those rights, a court may be more willing to intervene. It may permit further evidence to be led which does not satisfy the strict requirements for fresh evidence, if it is satisfied that the interests of justice require this. It may decide to substitute its own discretionary decision for that of the registrar, even though no House v. The King error is shown, again if it is satisfied that the interests of justice require this. To that extent, the review may be considered a de novo hearing. 10 In my opinion, this approach is consistent with the position that such reviews are not appeals and involve the exercise of discretion by the reviewing body; and with the policy considerations referred to by Jordan CJ in In Re the Will of Gilbert (1946) 46 SR(NSW) 318 at 323. It is also consistent with the general principles concerning interlocutory applications: they do not finally decide matters, and successive applications can be brought for the same orders; but generally, a later application for orders that have previously been refused will be summarily dismissed unless a change of circumstances is shown or there is evidence satisfying the strict requirements for fresh evidence.
I was also referred by the plaintiffs to the following passage from the judgment of Basten JA in Tomko (with whom Hodgson JA agreed, subject to his Honour's own reasons, and with whom Ipp JA also agreed), at [46]: That a "review" of the decision of the registrar pursuant to r 49.19 is not an appeal means that principles of restraint expressly adopted in relation to appeals do not, in terms, apply: c.f. Wentworth v Wentworth at [41] above. Further, the requirement to demonstrate error, which is an essential part of the appellate process, is also not applicable: see Coal & Allied Operations Pty Ltd v Australian Industrial Relations Commission (2000) 203 CLR 194 at [14] and CDJ v VAJ (1998) 197 CLR 172 at [111]. To introduce those constraints as applicable in the case of a procedure identified expressly as a "review" would be to impose constraints inconsistent with the language of the rule. While the plaintiffs submit that this passage, along with his Honour's elaboration of principle at [52], may be more favourable to their case, they accept that the majority view is nevertheless that of Hodgson JA cited above.
These principles are undoubtedly correct, and have been cited in the Court of Appeal on a number of occasions: Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 at [17]; Liverpool City Council v Estephen [2008] NSWCA 245 at [17]; Collier v Country Women's Association of New South Wales [2018] NSWCA 36 at [47]; Mohareb v Kelso [2018] NSWCA 164 at [26] (citing the judgment of Basten JA).
What emerges from each of these authorities, consistently with both judgments in Tomko, is that a review is not an appeal, and is not strictly limited to the cases where one of the grounds cited in paragraph [8] of Hodgson JA's judgment is made out, but is rather a question of exercising a discretion in the interests of justice. That a party can make out a ground which would found an appeal, whether it be a House v The King error or otherwise, is a relevant consideration in determining whether such a discretion should be exercised in the particular case, but is not the ultimate question for the Court.

Should the Registrar's decision be reviewed in this case?

I consider that the Registrar's decision should be reviewed in this case because the central tenet of Kirela's application for security, and the plaintiffs' opposition to an order for security, was the merits of the plaintiffs' claim. The evidence on which the plaintiffs sought to rely at the hearing of the motion was primarily directed to this subject. In those circumstances, having regard to rule 42.21(1A)(a) as explained by Live Board Holdings, the plaintiffs' evidence as to the merits of their claim was relevant and should have been admitted. Without such evidence, the plaintiffs' basis for opposing the orders largely evaporated. Similarly, the plaintiffs' evidence as to the circumstances in which Kirela took possession of the supermarket, and the equipment retained by Kirela on taking possession, should have been admitted without qualification as to the weight to be given to such evidence.

Further evidence on the review

I have already set out many of the relevant matters in respect of whether security for costs should be ordered or not. Some of these matters were not before the Registrar. On 23 and 24 October 2018, after Kirela had served its submissions in respect of a review, the plaintiffs put on further affidavits from their solicitor addressing some of the criticisms contained in Kirela's written submissions.
First, Mr David finally provided the financial statements for Mannellis IGA for the year ended 30 June 2017 (which included the results for 30 June 2016). I have already set out the contents of Mannellis IGA's financial statements. It appears from these statements that Mannellis IGA lost money in its first, partial year of operation, made $921,001 in its second year of operations, and suffered a substantial deterioration in its position thereafter. Mr David explained two aspects of Mannellis IGA's financial statements: first, the non-current loan recorded in the accounts for $4,592,555 was a loan by Trojan to Mannellis IGA; and, second, according to Ashleigh Sleiman, the property improvements recorded in the statements was the fitout and improvements done in the supermarket. Mr David deposed that Mr Sleiman undertook to take no steps to enforce Trojan's loan until after the conclusion of the proceedings.
Second, Mr David deposed as to the appropriate calculation of legal costs. Mr David has practiced as a solicitor since 1990 in commercial litigation and considered that market rates in this field were in the order of $500 an hour plus GST for a partner and $350 an hour plus GST for a solicitor with ten per cent of the work to be undertaken by a partner, thirty per cent by a senior associate and 60 per cent by a junior solicitor.
Third, Mr David gave further details were given of the number of occasions on which photographs and video footage were taken of water leakage and damage.
Finally, and appropriately, Mr David conveyed an apology from the plaintiffs for serving the evidence outside of the Court's orders and respectfully sought the indulgence of an extension of time.
Before me, Trojan undertook to be liable for any costs orders made against Mannellis IGA Pty Ltd. Trojan undertook not to take any steps to enforce its loan to Mannellis IGA Pty Ltd until any costs orders in favour of Kirela was paid. Mr Sleiman was not prepared, however, to give an undertaking to be personally liable for any costs orders in favour of Kirela.

Should security for costs be ordered?

As matters have unfolded on the review, there are six matters which are important to the Court's discretion as to whether to order security for costs in this case.
First and foremost, both parties point to the merit, or lack of merit, of the plaintiffs' claim. Kirela submitted that the plaintiffs misunderstood what the Court of Appeal said in Live Board Holdings about rule 42.21(1A)(a). It was only in the "exceptional case" where the Court could look at the merits of the plaintiffs' claim and weigh the merits for or against ordering security for costs: [100]-[102]. It was submitted that the Court in Live Board Holdings was careful not to find that in all cases the Court must consider the merit of the plaintiffs' claim, because every case will be at different stages of preparation when security for costs applications are made. Otherwise, every application for security for costs would turn into a 'mini-trial' of the main proceedings. This was not what the Court of Appeal meant, it was submitted. Kirela also sought to distinguish Live Board Holdings on the facts. The claim which was the subject of the application for security for costs had been filed many years ago, and its merit had been the subject of judicial criticism during that time by a number of judges. As a result Leeming JA found the claim lacked merit and that its lack of merit was a factor in favour of the grant of security in that case.
I consider that the Court in Live Board Holdings was doing no more than pointing to the express terms of rule 42.21(1A)(a), which entitles the Court to have regard to the merits of the claim in respect of which security for costs is sought and, if able to form a meaningful view on the merits of the claim, to take the merits into account. The rule does not mandate that the Court do so, and in many cases the parties will not agitate the matter but simply proceed on the basis that the claim is bona fide. As much can be seen from how Live Board Holdings has been applied. In Galati v Deans [2018] NSWSC 1600 (Ward CJ in Eq) and In the matter of Australian Style Holdings Pty Ltd [2018] NSWSC 1368 (Black J), their Honours considered that the evidence was insufficient for the prospects of success to be anything other than a neutral factor. In the matter of Australia Wattle Fund Pty Ltd [2017] NSWSC 1664, Black J considered that the matter was too complex and involved issues about which there would be significant factual contest at the hearing and no further assessment of its merits could reasonably be undertaken at such an early stage of the proceedings (at [23]).
In Luo v Windy Hills Australian Game Meats Pty Ltd (No 2) [2018] NSWSC 1139, Stevenson J noted Live Board Holdings at [19]: The Court of Appeal has recently emphasised that when looking at the merits of the proceedings it may be necessary to go further than concluding that the proceedings are not frivolous and that there are real issues to be tried. His Honour was able to, and did, assess the strength of the plaintiff's claims on a security for costs application. His Honour concluded that the plaintiff had prima facie a very strong case against the defendants and this was a factor that militated against providing security: at [45]. It should be noted that the plaintiff's claim was based on fraud but this did not preclude an examination of the merits of that claim.
In this case, the plaintiffs and Kirela both point to the merits of the claim as an important matter to take into account. I propose to take the same approach as Stevenson J and examine the evidence before me to determine whether a meaningful view of the merits can be formed and, if so, what that view is.
As to merit, Kirela relied on the number of amendments to the statement of claim and the lack of financial statements from Mannellis IGA. Neither assists me particularly as to whether the plaintiffs' claim as pleaded has good prospects of success. Kirela did not put on any evidence assessing the problems said to be recorded in the plaintiffs' photographs and videos. Nor do I have a defence from Kirela to indicate what its defence to the plaintiffs' claim will be, although the proceedings have been on foot for more than a year. The delay in filing a defence is referrable to the plaintiffs' series of amendments to their claim and, I was told, Kirela's reluctance to incur the costs of drafting a defence until security for costs had been provided. This does, however, leave the court in the position, when assessing the merits or otherwise of the plaintiffs' claim, of having little indication of what the defence to that claim will be.
Having regard to the number of occasions on which the plaintiffs' builder and staff thought it necessary to record water leaks into the supermarket, and having looked at the photographs and videos which were tendered on the review, it seems to me prima facie that the plaintiffs have a good claim that this was a recurring problem in their occupation of the supermarket. It might be thought that flooding, on at least two occasions, and leaks on some 12 other occasions, may have been viewed by customers as less than satisfactory in a supermarket offering food for sale. Such a sustained problem, unaddressed by Kirela, could impact the plaintiffs' business. There has been a substantial deterioration in Mannellis IGA's financial position. Against this, flooding and leaks occurred across the entire period of Mannellis IGA's occupation, which may indicate that this was not the cause of the losses sustained although I note there were fewer leaks in the profitable year than in the unprofitable years. Overall, based on the evidence before me on the review, I conclude that the plaintiffs' claims have merit. This matter militates against ordering security for costs.
Second, whilst Kirela says the plaintiffs' claims are not genuine as the proceedings were commenced at a time when the plaintiffs were already in rental arrears, I do not think this submission is made out. The plaintiffs have persisted in these proceedings for 14 months, no doubt at considerable cost, and they appear sincere in seeking redress in this Court for the losses they say have been sustained by reason of Kirela's alleged failings. I conclude that the plaintiffs' claims are genuine and this militates against ordering security for costs.
Third, whilst the financial statements for Trojan and Mannellis IGA for the year ended 30 June 2018 were not in evidence and thus the current financial position of the plaintiffs is not known, the plaintiffs accepted that there was reason to believe that the plaintiffs would be unable to pay the costs of Kirela if ordered to do so. The plaintiffs' impecuniosity militates in favour of ordering security for costs.
Fourth, is the plaintiffs' impecuniosity caused by Kirela? Establishing the adequacy of a plaintiff's financial position before their dealings with the defendant, as this requirement was explained in Jazabas Pty Ltd v Haddad, may be difficult in circumstances where the plaintiff is a corporation brought into existence for the purposes of doing business with the defendant and the defendant's allegedly egregious conduct has existed for the life of the special purpose corporation, see, for example, Gypter Pty Ltd v Defence Housing Australia [2018] WASC 298 at [20] per Master Sanderson. In such circumstances, it may be impossible to establish a healthy 'before' picture when there was no 'before'. It appears to me that Mannellis IGA faces this potential difficulty, as it was incorporated on 24 October 2014, the month before agreement is said to have been reached with Kirela's property manager for Mannellis IGA's occupation of the supermarket. I infer from the company's name and the timing of its incorporation that it was brought into existence for the specific purpose of operating a supermarket at the premises.
The plaintiffs submit that I should infer from the financial statements that Kirela caused their impecuniosity. If Trojan's loan to Mannellis IGA is excluded from Mannellis IGA's balance sheet for the year ended 30 June 2017, then the plaintiffs submitted that Mannellis IGA's assets exceeded its liabilities by some $3,370,000. The plaintiffs submit this is an appropriate approach because, by its nature, the Trojan loan is non-current. If that were all, then Mannellis IGA would be able to provide security for costs. However, the plaintiffs submitted that, by taking possession of the supermarket, Kirela had converted the property improvements and stock on hand, and as a consequence, Mannellis IGA was in a negative asset position of ($890,211). In this way, the plaintiffs submit that Kirela's actions have caused Mannellis IGA's impecuniosity.
I think, with respect, it is simpler than that. It is apparent that after Mannellis IGA's first partial year of operations at a loss (which I consider unremarkable in the first year of trading), Mannellis IGA made $900,000 profit in its second year of operations before slumping to a loss in its third year of operations. This is consistent with a loss of custom. As I understand the plaintiffs' claim, the defects with the premises which Kirela declined to repair contributed to that loss of custom. Mannellis IGA's financial performance over time is broadly consistent with this, albeit as I have already noted, flooding and leaks occurred across the entire period of Mannellis IGA's occupation but there were fewer leaks in the profitable year than in the unprofitable years. In addition, what is apparent from the financial statements of Trojan and Mannellis IGA and the National Australia Bank documents is that the companies incurred loans and liabilities of some $4 million to fit out the supermarket and some $500,000 to acquire equipment to operate the supermarket. In the events that have occurred, the companies no longer have the benefit of these substantial outlays. Rather, the companies have the continuing obligation to National Australia Bank to pay for the fitout and equipment without the underlying business revenue to do so.
Further, the plaintiffs submitted that, had Kirela not taken possession of the supermarket on 4 October 2017, the plaintiffs could have sold some of the equipment within the supermarket such as kitchen equipment, whitegoods, refrigerators and freezers, shopping trolleys and the like. In addition, there was stock of some $300,000. The diesel generator and USP back-up generator, cash registers, scanners and printers worth some $350,000 remained within the premises. I agree that the fact that fixtures, fittings and equipment, which cost the plaintiffs a great deal of money, are now in the possession of Kirela has the result that the plaintiffs cannot sell the fixtures, fittings and equipment which may enable the plaintiffs to satisfy a costs order in favour of Kirela.
Taking these matters into account, it seems to me that plaintiffs have discharged the onus of establishing that Kirela's actions have materially contributed to the plaintiffs' inability to meet an order for security for costs. This is a matter which tends against ordering security for costs.
Fifth, the plaintiffs did not submit that an order for security for costs would stultify the proceedings. This is a matter in favour of an order for security for costs.
Finally, to what extent will the cross claim overlap with the issues in the substantive proceedings? I was told that the cross claim would be for unpaid rent and a "make good" claim which would not exceed $250,000. A cross claim is to be filed within 28 days of service of the Statement of Claim: rule 9.1, Uniform Civil Procedure Rules. The explanations for not filing a defence do not readily explain the failure to file a cross claim, particularly if the cross claim is as straightforward as I was told it would be. The absence of a cross claim leaves the court in the position that it has little to gauge the extent to which any issues in a cross claim may overlap with the issues in the substantive claim. However, relying on Kirela's counsel, there appears to be little overlap between the proposed cross claim and the plaintiffs' claim.
Having regard to each of these six matters, I consider that, on provision of the two undertakings proffered by Trojan, it is not appropriate to order security for costs.
In light of my decision, it is not necessary to review the amount assessed by the Registrar to be provided by way of security but I note that the Registrar did not have before her the evidence of Mr David as to commercial hourly rates and the allocation of legal work in a matter such as this to partners, senior associates and more junior members of staff. Baker McKenzie is an excellent firm and its hourly rates reflect its place in the legal market. However, if I had had to do so, I would have adopted the hourly rates and apportionment of tasks set out by Mr David in preference to that of Mr McCredie. Mr McCredie's apportionment of tasks in this matter between a partner and a senior associate does not accord with my observations and experience. The Registrar's approach to order security for costs be provided by tranches was a very sensible way of dealing with the uncertainties posed by the absence of the cross claim.
In respect of the costs of the motion before the Registrar and of the review before me, I am minded to make an order that the costs of the motion and the review by the parties' costs in the cause. I say this because of two factors. The plaintiffs put evidence before me which should have been put before the Registrar, in particular, Mannellis IGA's financial statements. Against this, Kirela's submissions made to the Registrar as to the admissibility of the plaintiffs' evidence were, with respect, wrong, but forcefully and persuasively put, and resulted in the Registrar exercising her discretion without reference to all relevant material.

ORDERS

I make the following orders: 1. ORDER the first plaintiff by 28 November 2018 to provide a written undertaking to the defendant to: 1. be liable for any costs orders made in these proceedings against the second plaintiff; and 2. not to take any steps to obtain repayment of any loans by the first plaintiff to the second plaintiff until the final determination of the plaintiffs' claims in these proceedings and the payment of any costs orders made in favour of the defendant in respect of the plaintiffs' claims in these proceedings. 1. Subject to Order 1: 1. Pursuant to rule 49.19 of the Uniform Civil Procedure Rules 2005, vacate the orders made by the Registrar on 21 August 2018. 2. Dismiss the defendant's motion filed on 14 June 2018. 1. The costs of the defendant's motion filed on 14 June 2018 and the plaintiffs' motion filed on 12 September 2018 to be the parties' costs in their respective causes. 2. Grant liberty to the parties to seek a costs order in terms other than Order 3 by filing and serving written submissions within 7 days, limited to 5 pages. 3. Stand the matter over for further directions in the Real Property List on 7 December 2018.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 November 2018

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