These proceedings were commenced by Statement of Claim filed on 28 October 2020. The plaintiff sought relief pursuant to s 37A of the Conveyancing Act 1919 (NSW) in respect of a mortgage granted by the first defendant in favour of the second defendant over a property in Boambee. The mortgage was granted on 28 July 2020 and registered on 30 July 2020. The third defendant, the Registrar-General, filed a submitting appearance save as to costs.
The proceedings were listed for directions on 19 November 2020. However, on 16 November 2020, the solicitor for the first and second defendants caused a Discharge of Mortgage to be lodged in respect of the mortgage, and informed the plaintiff's solicitors of that fact. The discharge had been registered by 19 November 2020. In the meantime, a consent order was made standing the proceedings over to 27 November 2020 for further directions.
On 26 November 2020 orders were made, again by consent, including an order that "the proceedings are discontinued with costs reserved". Directions were also made for the filing of evidence and submissions on the question of costs, with that question to be dealt with on the papers.
The plaintiff contends that the appropriate order for costs is that the first and second defendants pay the plaintiff's costs of the proceedings. The first and second defendants contend that the Court should order that the plaintiff pay the first and second defendants' costs of the proceedings, or alternatively that there be no order as to costs.
The plaintiff relies upon the affidavits of Peter James, solicitor, of 3 December 2020 and 22 December 2020. The first and second defendants rely upon the affidavit of Jason McClung, solicitor, of 11 December 2020. The Court has read and considered those affidavits, as well as the written submissions provided (by the plaintiff dated 4 December 2020 and 22 December 2020 in reply; and by the first and second defendants dated 11 December 2020). The third defendant has not participated in the dispute as to costs. The Court will make no order in respect of the third defendant's costs.
In brief, the plaintiff submitted:
1. that the default position in Uniform Civil Procedure Rules ("UCPR") r 42.19 that applies in respect of proceedings that are discontinued does not operate here because the Court has ordered otherwise;
2. the plaintiff was effectively forced to commence the proceedings, but the proceedings became unnecessary due to the change of position by the first and second defendants in proceeding to have the mortgage discharged; and
3. the conduct of the first and second defendants in relation to the creation of the mortgage was unreasonable.
In brief, the first and second defendants submitted:
1. that UCPR r 42.19 applies such that the plaintiff must establish some good reason to depart from the default position that the discontinuing party pays the costs of the other parties;
2. the plaintiff acted unreasonably in commencing the proceedings without warning and without giving the first and second defendants the opportunity to provide the relief sought on a consensual basis; and
3. the Court should infer that had such an opportunity been given, the first and second defendants would have discharged the mortgage so as to avoid any need for litigation.
In reply, the plaintiff submitted that such an inference should not be drawn, and in any event the plaintiff had reason to think that the mortgage would not have been discharged simply upon request, and had reason to be concerned that rights under the mortgage (such as the second defendant taking possession of the property) might be exercised.
It is necessary to refer to some uncontroversial facts. These are:
1. the Boambee property, which had been solely owned by the second defendant became, by transfers, solely owned by the first defendant in December 2015;
2. in 2018, the plaintiff commenced proceedings against the first defendant in the New South Wales Civil and Administrative Tribunal ("NCAT") seeking monetary relief in respect of building work carried out at the property;
3. on 10 June 2020 an order was made by NCAT that the first defendant pay the plaintiff the sum of $152,579.65;
4. on 2 July 2020 an order was made that the first defendant pay the plaintiff's costs of the NCAT proceedings;
5. on 8 July 2020 the first defendant lodged an appeal against the orders and sought a stay of the orders;
6. the stay application was dismissed on 28 July 2020;
7. the mortgage over the property that is the subject of the relief sought in these proceedings was executed on 28 July 2020 and registered on 30 July 2020;
8. the mortgage apparently secured a principal sum of $638,692.66;
9. prior to the registration of the mortgage, the property was not encumbered by any registered mortgage;
10. on 11 August 2020 the monetary order made by NCAT in favour of the plaintiff was registered as a judgment in the District Court at Coffs Harbour;
11. on 28 September 2020 the first defendant made an application to pay the judgment by instalments of $1,000 per week;
12. the Financial Statement attached to the application recorded that the property was the first defendant's only substantial asset, that it had a value of $700,000, and was encumbered by the mortgage to the second defendant in the sum of $638,692.66;
13. the plaintiff thus became aware of the mortgage on about 6 October 2020;
14. the plaintiff commenced these proceedings on 28 October 2020 without notice to the first and second defendants; and
15. the mortgage was discharged on about 19 November 2020.
The first matter to consider is the operation of UCPR r 42.19 in the circumstances of this case. By UCPR r 42.19(1) the rule is stated to apply to proceedings "that are discontinued by the plaintiff, as referred to in rule 12.1". UCPR r 12.1 allows a plaintiff in certain circumstances to discontinue the proceedings "by filing a notice of discontinuance". This may be done with the consent of each other active party in the proceedings, or otherwise with the leave of the Court. No notice of discontinuance has been filed in this case. The orders made by consent on 26 November 2020 purported to discontinue the proceedings, without expressly providing for the filing of any notice, with costs reserved.
In these circumstances, it is difficult to see how UCPR r 42.19 can apply. It cannot be said that the proceedings have been discontinued by the plaintiff "as referred to in rule 12.1" when there has been no filing of a notice of discontinuance. The filing of such a notice is the only means by which proceedings can be discontinued in accordance with rule 12.1. I will therefore proceed on the basis that the default position laid down by UCPR r 42.19 does not apply in the present case. However, as will be seen, good reasons exist for a departure from the default position, so the same ultimate result would follow regardless.
In essence, the circumstances in which the mortgage was created, and the discharge of the mortgage which rendered further pursuit of the proceedings unnecessary, are factors that in my opinion would make it inappropriate to order that the plaintiff pay the costs of the first and second defendants.
As already noted, the mortgage was executed on 28 July 2020 and registered on 30 July 2020. This occurred within weeks of the orders made by NCAT against the first defendant in favour of the plaintiff (and on the day the first defendant's stay application was refused). The property had not hitherto been subject to any registered mortgage. Given the historical relationship between the first and second defendants and the property, the circumstances gave rise to a reasonable concern that the first defendant, in conjunction with the second defendant, was acting so as to thwart recovery efforts by the plaintiff. Leaving aside for the moment the fact that the proceedings were commenced without notice, there was in my view a reasonable basis for the commencement of the proceedings alleging that the mortgage was an alienation of property with intent to defraud creditors. That conclusion is reinforced by the alacrity with which the mortgage was discharged following the commencement of the proceedings. I note that no evidence has been adduced to the effect that the mortgage transaction, said to involve an advance to the first defendant of a principal sum of $638,692.66 that was not repayable throughout a 12-year period, was a genuine transaction.
The proceedings, having been reasonably commenced by the plaintiff, became unnecessary due to the discharge of the mortgage, which can be readily seen as a change of position on the part of the first and second defendants (see OPENetworks Pty Ltd v Myport Pty Ltd [2019] FCA 1659 at [68]). The plaintiff thereby achieved practical success in the proceedings and no longer had any need to continue.
These factors tend to suggest that it would be appropriate to order the first and second defendants to pay the plaintiff's costs of the proceedings. It is necessary, however, to also consider the fact that the proceedings were commenced without notice.
In this regard, the first and second defendants referred to various authorities to the effect that if a letter of demand is not sent before proceedings are commenced, the plaintiff may be at risk on the question of costs if it is shown that the defendant would have conceded (see, for example, Bates v Lloyd [2005] NSWSC 1253 at [12]; Windgap Foundation Ltd v Solomons [2018] NSWSC 809 at [65]). The first and second defendants submitted that the Court should infer that had a letter of demand been issued before commencement, the mortgage would have been discharged. Reference was made to the earlier resolution of an issue concerning a caveat and an issue concerning an asset preservation order, and further to the prompt action taken after the commencement of proceedings to discharge the mortgage.
The plaintiff submitted that such an inference should not been drawn because there is a significant difference between being faced with proceedings as opposed to a mere letter of demand. That is true, but the point is that the first and second defendants were not given the opportunity to respond to a letter of demand. I think that had that opportunity been given there would have been a reasonable chance that the first and second defendants would have conceded and taken steps to have the mortgage discharged. Of course, by that time, the plaintiff would have already incurred the costs of undertaking the investigations in relation to the mortgage, and formulating the essence of its case so that it would be in a position to commence proceedings quickly if there was no concession.
The plaintiff's solicitor gave evidence as to the reasons why no letter of demand was sent prior to commencement. The principal reason given was a concern about the taking of pre-emptive action to exercise powers under the mortgage, such as the taking of possession, which would further frustrate the plaintiff. A concern of that nature seems reasonable, but no attempt was made to seek interlocutory relief, let alone on an ex parte basis. The risk of powers under the mortgage being exercised existed even after service of the Statement of Claim.
Taking all of the circumstances into account, it is my opinion that the appropriate exercise of the Court's discretion as to costs under s 98 of the Civil Procedure Act 2005 (NSW) is to order that the first and second defendants pay two-thirds of the plaintiff's costs of the proceedings. That order broadly reflects an assessment that the circumstances warranted the bringing of proceedings, which became redundant due to the first and second defendant's change of position, but the plaintiff should not receive a full costs order because of the prospect that some of the costs may have been avoided had a letter of demand been sent before commencement. Insofar as the costs of the proceedings relate to the present application, the same costs order is appropriate as it reflects the fact that the plaintiff has largely, but not entirely, succeeded on that application.
Accordingly, the Court will order that:
1. the first and second defendants pay two-thirds of the plaintiff's costs of the proceedings; and
2. there be no order as to the costs of the third defendant.
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Decision last updated: 09 April 2021