Wollongong City Council v Legal Business Centre Pty Limited

LBC's proceedings 3LBC owns land in Wollongong. It was previously owned by Amir Harb and Habib Harb, who are the beneficiaries of a family trust of which LBC is the trustee. Amir Harb and Habib Harb are also the directors of LBC. 4In August 2002, an application was made to the Council for development approval for a mixed use commercial/residential development on the land. The application was refused. In about November 2003 a second development application was lodged, which was revised in about June 2004. The revised second development application was also refused. On 8 March 2005, an appeal to the Land and Environment Court, in which a further revised second development application was made, was lodged. 5By transfer dated 22 July 2005, Amir Harb and Habib Harb transferred the land to LBC for a consideration of $370,000. There is no information before the Court as to whether LBC was substituted as an applicant in the proceedings. On 31 May 2006, the Land and Environment Court upheld the appeal. 6Notwithstanding the success in the Land and Environment Court, it appears that LBC decided not to act upon the development consent thereby granted, as in March 2007, a third development application was lodged. That development application was also refused and an appeal was lodged with the Land and Environment Court in about December 2007. The third development application was revised and on 5 May 2008 the Court granted consent to the revised third development application. 7In mid 2009, LBC filed a statement of claim in the Supreme Court against the Council alleging a breach of duty in the manner in which the development applications were processed. The original statement of claim was never served. The first pleading served upon the Council was an amended statement of claim filed on 6 November 2009 and served three days later. 8LBC gave notice in May 2010 that it was proposing to amend its pleading. It provided a draft document to the Council in March 2011, in circumstances where LBC had failed to comply with two orders requiring it to serve an amended pleading. LBC abandoned that draft pleading and provided a draft of another amended statement of claim to the Council on 27 May 2011. 9On 24 June 2011, LBC filed a further amended statement of claim (being in the form of the draft provided on 27 May 2011) pursuant to consent orders made by the Court on 22 June 2011. The Council has filed its defence to the further amended statement of claim. The consent order bore the following notation: "1. The further amended Statement of Claim has substantial changes from the prior pleadings filed on behalf of [LBC] such that [LBC] be excused from filing a further amended Statement of Claim that contains interlineations of the parts of the prior pleadings that have been amended; 2. The substantial changes to [LBC's] pleading necessitate [LBC] giving additional discovery in categories nominated by [the Council], such categories to be agreed between the parties or, in the absence of agreement, to be determined by the Court and [the Council] is to propose such further categories within 21 days of the filing of its Defence to the further amended Statement of Claim." 10The parties have attended to various procedural steps in the matter, although, as the above notation indicates, additional steps in respect of some procedures are required. Generally speaking, the procedural steps have been the subject of delay and disputation. There have been a number of directions hearings and the Court from time to time has made procedural orders. These orders have not always, if at all, been the subject of timely compliance. The change in the pleading has rendered certain procedural steps inadequate.

The application for security for costs 11By letter dated 28 September 2011, the Council foreshadowed to LBC that it may make an application for security for costs and requested that LBC provide certain financial material in order to permit it to assess whether it should make the application. LBC failed to respond to that request, despite follow-up letters from the Council's solicitors on 17 October 2011 and 10 November 2011. 12On 13 January 2012, the Council filed its notice of motion seeking an order for security for costs in the sum of $462,465 or such other sum as the Court considered appropriate. The notice of motion was supported by an affidavit of Ms Morgan, solicitor, affirmed 13 January 2012, in which she provided an assessment of the costs likely to be incurred in the future preparation of the matter. The claimed sum also included an assessment of the costs incurred during the course of various interlocutory processes in respect of which LBC had been ordered to pay costs. Ms Morgan assessed the costs so ordered to be paid by LBC in the sum of approximately $50,000. 13LBC opposed the application for security for costs. In opposition to the application, Amir Harb swore an affidavit dated 14 February 2012 in which he provided certain evidence relating to the financial circumstances LBC, himself and Habib Harb and LBC Lawyers Pty Limited. That and the other evidence before the trial judge revealed the following information as to the financial circumstances of LBC, Amir Harb and Habib Harb and LBC Lawyers Pty Limited (LBC Lawyers). 14LBC is the trust company for the Harb Family Trust. It is, as I have already indicated, the registered proprietor of the land, having acquired it in 2005. The land is subject to a registered mortgage. The balance outstanding on the mortgage is approximately $420,000. LBC has an issued share capital of two ordinary class shares and a paid up capital of $4.00. Amir Harb and Habib Harb hold one share each. 15The Harb Family Trust tax return for the financial year ending 30 June 2010 revealed that LBC earned a gross income of $38,669 but that its net income position was a loss of $25,702. The principal expense was in respect of interest in the sum of $52,111. The income tax return revealed trust assets of $939,431 of which current assets comprised $62,413. Total liabilities were in the sum of $986,049 of which current liabilities comprised $345,489. There was no evidence that LBC had any other assets or income or that it carried on any activity other than as trustee for the Harb Family Trust. 16In the financial year ending 30 June 2010, Amir Harb and Habib Harb each disclosed a gross income of $6,000 which was attributed to director's fees. 17Amir Harb and Habib Harb are also directors and shareholders of LBC Lawyers. In his affidavit, Amir Harb described LBC Lawyers as an affiliated company to LBC. In the financial year ending 30 June 2010, LBC Lawyers disclosed a total income of $44,077 against which they claimed total expenses of $76,527 including rent of $30,000 and a small amount of depreciation and motor vehicle expenses. Under the heading "all other expenses" a total sum of $34,738 was claimed. Its net position was a loss of $32,450. It had carried forward tax losses in excess of $136,000. 18The income tax returns for the financial years ending 30 June 2006 to 30 June 2009 inclusive revealed a similar picture of very low or negative taxable incomes for each of LBC, Amir Harb, Habib Harb and LBC Lawyers. In particular, LBC's taxable income during this period ranged from $12,760 in 2006 to a loss of $10,700 in 2009. Its gross income and expenses in this period were relatively steady. Gross income ranged between approximately $57,000 in 2006 to $66,000 in 2009. Expenses, predominantly interest, ranged from approximately $30,000 in 2006 to approximately $59,600 in 2009. In the same period, the value of total assets increased from approximately $578,600 to $832,712. 19There was no evidence as to the nature of LBC's assets, other than its ownership of the land. Nor was there any evidence as to whether the increase in the value of the assets recorded in the income tax returns reflected an increase in the value of the land. It would be reasonable to infer that was the case.

Application to adduce further evidence 20This is a convenient place to deal with LBC's application to adduce further evidence on the appeal. LBC sought to adduce evidence of a real estate letter of appraisal given by the commercial property manager of Ray White, real estate agency, at Wollongong. The Council opposed the application essentially on two grounds: first, on the basis that the appraisal was inadmissible opinion evidence; and secondly, on the basis that it was apparent from material before the trial judge that LBC had obtained valuation evidence prior to the hearing of the security for costs application but had not tendered that or any other valuation evidence. 21Both points are well made and the application to adduce further evidence should be rejected. However, there was other evidence before the Court, in the form of the trust tax return to which I have referred and to which objection was not taken, that made reference to the value of assets in the sum of approximately $940,000. As I have indicated, a reasonable inference on all of the evidence is that the trust property was the land in question. 22LBC Lawyers' gross earnings during the 2006-2009 period ranged from approximately $72,000 to $128,000 with net losses in each year except for 2009, when it returned a taxable income of $9,556. Amir Harb and Habib Harb's income during this period remained at between $5,000-6,000 per annum. 23Amir Harb stated in his affidavit that "[d]uring and since the transition phase of procuring the Development Application", he had: "... spent countless hours on an almost full time basis away from my ordinary profession as a solicitor working towards procuring the Development Application, exposing corruption, being as a whistleblower, breaking the walls of secrecy on corruption in NSW and Wollongong City Council, file keeping, making submissions, researching, fact finding and investigation, seeking and reading documents, reforming the system, having conduct in two Land and Environment Court proceedings, two District Court proceedings and these Supreme Court proceedings." 24He had also been writing a book during this period, which he described as: "... a tell all book that joins the dots together titled; Under the Belly of the Biggest Corruption Scandal in Australian Government all of which are ancillary to the Development Application and related to these proceedings." 25Mr Amir Harb also stated that he had borrowed money from family and friends. In all, he stated that the holding costs of the site, the funding of the development application and the proceedings cost him and his brother in excess of $500,000 and this was a debt owed by LBC. He also stated that he and Habib Harb had sold assets during this period, which included family assets,. He contended that these sales were "at fire sale prices". Mr Harb did not state whether he or Habib Harb owned any other assets.

Legal principles governing the making of an order for security for costs 26The Uniform Civil Procedure Rules 2005 (UCPR), r 42.21 provides: "42.21 Security for costs (1) If, in any proceedings, it appears to the court on the application of a defendant: ... (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so ... the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given. (2) Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct. (3) If the plaintiff fails to comply with an order under this rule, the court may order that the proceeding on the plaintiff's claim for relief in the proceedings be dismissed. (4) This rule does not affect the provisions of any Act under which the court may require security for costs to be given." 27The Corporations Act 2001 (Cth), s 1335(1) is in relevantly the same terms: "1335 Costs (1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given." 28Both sources of power involve the exercise of a discretionary judgment. In approaching its task in the case of a corporation, the court should adopt a practical commonsense approach to the examination of the financial affairs of the corporation: Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; 20 VR 377 at [15]. 29The principles governing the exercise of the discretion are well established and are relevantly the same in respect of each source of power: see Livingspring v Kliger Partners at [10]. The party seeking an order for security for costs (who, for convenience I will refer to as the defendant) bears the onus of establishing that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful: see KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; 56 FCR 189; Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972; Pioneer Park Pty Ltd (in liq) v Australian and New Zealand Banking Corporation [2007] NSWCA 344; Prynew Pty Ltd v Nemeth [2010] NSWCA 94. 30There is no predisposition to the making of an order: see Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 509; Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 623-624; KP Cable Investments v Meltglow. Once the defendant has discharged the onus of establishing that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful, the onus shifts to the party against whom the order is sought (who I will refer as the plaintiff) to establish a reason why security should not be granted: KP Cable Investments v Meltglow; Equity Access Ltd v Westpac Banking Corporation; Pioneer Park v Australia and New Zealand Banking Corporation; Prynew Pty Ltd v Nemeth. 31In Staff Development & Training Centre Pty Ltd v Commonwealth of Australia [2005] FCA 1643, Spender J, at [9], summarised the factors that have been identified in the case law as governing the exercise of discretion, namely: "(a) The quantum of risk that a costs order will not be satisfied; (b) Whether the making of an order would be oppressive in that it would stifle a reasonably arguable claim; (c) Whether any impecuniosity of the applicant arises out of the conduct complained of; (d) The prospects of success; (e) Whether there are aspects of public interest which weigh in the balance against such an order; (f) Whether there are any particular discretionary matters peculiar to the circumstances of the case." 32Delay is also a relevant factor in determining whether an application for security for costs is to be made: Commonwealth v Cable Water Skiing (Australia) Ltd (1994) 14 ACSR 760 at 762; Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 at 71; KP Cable Investments v Meltglow. However, delay is not of itself a disentitling factor: see Bryan E Fencott v Eretta; Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114. 33If the plaintiff's adverse financial circumstances are alleged to be due to the effect of the defendant's alleged conduct subject of the claim, the plaintiff bears the onus of establishing the adequacy of its financial position before the dealings with the defendant and that the defendant's conduct either caused, or at least materially contributed to, the plaintiff's inability to meet an order for costs: see Fiduciary v Morningstar Research [2004] NSWSC 664; 208 ALR 564 at [100]; Jazabas Pty Ltd and Ors v Haddad and Ors [2007] NSWCA 291. Further, where the plaintiff's claim is based upon a loss of profit, the court will take a more cautious approach in its consideration of the cause of impecuniosity than where the claim is based on the infliction of damage: Fat-sel Pty Ltd v Brambles Holdings Ltd (1985) 3 ACLC 312; ATPR ¶40-544 at 46, 428; Jazabas v Haddad at [33]. 34There is a further matter to which reference should be made. In some cases, persons who stand behind a plaintiff corporation, or who otherwise stand to benefit from the litigation, may offer to be responsible for the costs. Should that occur, it may provide a reason for the court to exercise its discretion in a plaintiff's favour and not order security: see KP Cable Investments v Meltglow; Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306; Prynew v Nemeth at [33]-[45]. 35In the present case, it is apparent that Amir Harb and Habib Harb stand to benefit should the litigation be successful. However, neither have offered to be responsible in the event a costs order is made against LBC. In any event, on the evidence, they would not have the financial capacity to be responsible for the costs.

Reasons of the trial judge 36The trial judge's reasons were relatively brief. His Honour noted that LBC had a total paid-up share capital of $4, but commented that that was not of great significance in terms of assessing the corporate worth of an entity. His Honour noted that LBC owned buildings the subject of the proceedings and that although the land was the subject of a mortgage and encumbered by a caveat, he was not convinced at that stage that LBC did not have the capacity to meet an order for costs. 37His Honour observed that LBC appeared to be a trust company, the beneficiaries of which were Amir Harb and Habib Harb. His Honour then concluded: "In all of the circumstances, and they include the significant period that has already elapsed in these proceedings and the effect of the alleged conduct on the applicant, I am not minded to exercise the discretion to order security for costs." 38His Honour added that his decision might change depending on two matters: first, should there be further evidence relevant to a security for costs application; and secondly, should there be a continuation of conduct engaged in by Amir Harb in incurring costs beyond what would normally be expected. In this regard, his Honour cited correspondence by Amir Harb directly to the Council, contrary to professional practice, in circumstances where the Council had solicitors acting for it.

The Council's submissions on the appeal 39The Council contended that his Honour, in refusing the application for security, erred in the following essential respects. First, that he failed to pose and determine the threshold question required by UCPR, r 42.21 and the Corporations Act, s 1335(1). Secondly, that his Honour failed to correctly assess the evidence. Thirdly, that his Honour erred in concluding that there were discretionary considerations that stood against an order for security for costs. Finally, that his Honour failed to give legally adequate reasons for his decision. 40As I have indicated, his Honour's reasons were brief. His Honour did not engage in any dissertation of the legal principles but rather dealt directly with the basis upon which the Council made its application, namely, LBC's impecuniosity. It was not inappropriate for his Honour to approach the application in a summary way. He was dealing with the matter during the course of a busy court day and there is no basis to infer that his Honour misunderstood the legal principles he applied. Accordingly, I would not uphold the Council's first complaint. For the same reason, I would reject the complaint that his Honour did not give legally adequate reasons. 41However, I am satisfied that his Honour erred in his assessment of LBC's financial position and its ability to meet any costs order made against it. The effect of the evidence to which I have referred is that LBC, as trustee for the Harb Family Trust, has a net asset value of virtually nil. In other words, its assets and liabilities are approximately equal. There is no evidence of income other than rental income but its expenses, most particularly in the form of interest payments, have in most years exceeded, in a small amount, the amount of income earned from all sources. To the extent that the real beneficiaries of the proposed development application in respect of the land are Amir Harb and Habib Harb, the evidence as to their financial position is such that they would not be able to pay any order for costs made against LBC and neither have made an offer to do so. 42Accordingly, I am of the opinion that the Council has satisfied the onus of establishing that there is reason to believe that LBC and the parties who stand to benefit from any success in the proceedings will be unable to pay its costs, should the proceedings fail, or should LBC for any reason be made liable for an order for costs. 43LBC submitted that even if the Council had satisfied the preliminary onus under the section, his Honour correctly exercised his discretion, given the delay in the making of the application and the fact that it was the conduct of the Council which has caused its impecuniosity. 44In the present case there was delay in bringing the application for security for costs. The amended statement of claim, which was the first legal process served upon the Council, was served in November 2009. The application for security for costs was not made until 13 January 2012. The Council submitted, however, that the mere passage of time did not provide a reliable guide as to the actual delay in the matter. It is submitted that much of the two years delay since the service of the amended statement of claim upon it was due to inactivity or vacillation on the part of LBC. 45In its written submissions to the trial judge, the Council set out a chronology of the procedural steps in the matter and submitted that the case had not progressed in any substantive way due to LBC's conduct. In particular, it is submitted that some 13 months elapsed from the time the Council filed its defence to the amended statement of claim until LBC served its further amended statement of claim. During that period of time, LBC was in breach of two procedural court orders. The Council contended that LBC wasted the totality of 2010 and a significant portion of 2011 in advancing its claim. The Council pointed out that it first notified its intention to bring an application for security for costs in September 2011. The same submissions were advanced before this Court. 46In my opinion, the Council has delayed in bringing this application. However, delay itself is not a disentitling factor. In the present case, given that the claim is still at the pleadings stage, I am satisfied that the delay involved is not such that an order ought not to be made. However, LBC ought not to be prejudiced by the delay that has in fact occurred. Accordingly, any order for security should be one in respect of future costs, and not those that have been incurred prior to the bringing of the application. It should be noted that, subject to including in its assessment those costs in respect of which orders have already been made in its favour, the Council's application was in respect of costs to be incurred in the future. 47The final question for determination was whether LBC had discharged its onus of satisfying the Court that it was the Council's conduct which caused or materially contributed to its inability to meet an order for costs. In my opinion, that onus was not discharged. LBC became the registered proprietor of the land in July 2005. At that time, the development application was subject to proceedings in the Land and Environment Court. Those proceedings concluded successfully in favour of either Amir Harb and Habib Harb or LBC on 31 May 2006. It is likely, therefore, that any loss sustained by LBC, assuming the existence of a duty of care and a breach of that duty by the Council as alleged, is limited to a period of less than 12 months. Further, there was no evidence to satisfy the Court of the adequacy of LBC's financial position before its dealings with the Council. This is true regardless of whether one considers LBC's claim as being confined to the period to which I have referred or whether LBC is able to establish that it was an assignee of any rights that Amir Harb and Habib Harb had against the Council.

Order for security 48It follows, in my opinion, that an order for security should be made. The Court in the exercise of its discretion is able to make that order itself, or it may remit the matter to the trial court for determination. In making an order for security, a court will frequently order that security be provided in tranches, particularly where the case is of some complexity and it is likely to be lengthy, as appears to be the case here. 49In my opinion, the proper course for this Court to take is to make an initial order and to otherwise remit the matter to the trial court for the making of further orders for security as and when required. 50Having regard to the Council's assessment of the costs likely to be incurred, I am of the opinion that an appropriate order is for the payment of $100,000 by way of security for costs. This amount is to provide security for costs for the future conduct of the matter only and excludes any costs orders made to date. As I have indicated, the Council may approach the Court in the Common Law Division for a further order should it be so advised. 51Accordingly, I propose the following orders in the matter:

1. Grant leave to appeal;
2. Appeal allowed;
3. Quash orders made by the trial judge;
4. Order that the respondent, Legal Business Centre Pty Limited provide security for costs as follows: (1) by payment of the sum of $100,000 to the Registrar of the Supreme Court (Common Law Division) or in such other manner as may be agreed by the parties; (2) liberty to the appellant, Wollongong City Council, to apply to the Supreme Court for such further order for security as it sees fit on the giving of 21 days notice;
5. Order the respondent to pay the appellant's costs at first instance and on the appeal. 52MEAGHER JA: I agree that the orders proposed by Beazley JA should be made. My reasons for so agreeing are as follows. 53The primary judge's decision involved the exercise of the discretion to award security for costs. Beazley JA has summarised the principles which govern the exercise of that discretion. Like her Honour, I am not satisfied that the primary judge misunderstood those principles. However, his Honour misapprehended the relevant facts upon which the discretion was to be exercised. Specifically, his Honour erred in not concluding that there was good reason to believe that LBC would be unable to pay the costs of the litigation, if the Council is successful in the proceeding. Notwithstanding that this appeal is concerned with a matter of practice and procedure, it is appropriate in the circumstances of this case that this Court, in the interests of justice, intervene and re-exercise that discretion. 54The evidence before the primary judge established the following matters. LBC is the trustee of the Harb Family Trust and in that capacity acquired the Wollongong property in July 2005 from its directors, Amir and Habib Harb. The evidence did not suggest that LBC held any assets or carried on any activities other than as trustee of that trust. As at 30 June 2006 the trust had total assets of $578,609 and total liabilities in the same amount. Those assets included the property. As at 30 June 2010, the trust had assets of $939,431 and total liabilities of $986,049, ie a deficiency of net assets of $46,618. For the financial year ending 30 June 2010 its business expenses exceeded its business income by $25,702. There was no evidence which provided a basis for concluding that the trust's financial position had improved since 30 June 2010. 55That evidence provides good reason for believing that LBC will be unable to pay the costs of the Council in the event that its claim is unsuccessful and it is ordered to pay those costs. The primary judge erred in concluding otherwise. In addition, in the face of that evidence, it cannot be concluded that the Council's alleged misconduct caused or at least materially contributed to LBC's current adverse financial circumstances and inability to meet an order for costs. 56LBC's claim as currently formulated is that by reason of breaches of duty by officers of the Council in dealing with development applications lodged between August 2002 and March 2007, it suffered loss and damage. In August 2008, the Land and Environment Court upheld a revised version of the development application lodged by LBC in March 2007. That decision permitted the construction of a seven to eight storey mixed-use development on the relevant site. That development is different in terms of floor space ratio from those which were sought by the earlier applications lodged in August 2002 and October/November 2003. 57LBC claims damages on the basis that, absent the Council's alleged breaches of duty and misconduct, it would have obtained in late 2003 an approval for a development having a "similar scale" to that upheld by the Land and Environment Court in August 2008. Neither the pleading nor the particulars explain the basis on which LBC is said to be entitled to sue in respect of conduct concerning the processing of applications lodged in the period before it acquired the land in July 2005. 58I agree with Beazley JA that any delay involved in the making of the application for security for costs should not have the consequence that no order should be made. 59Although the evidence indicates that the persons likely to benefit financially from the success of the proceeding include Amir and Habib Harb, there was no offer on their part to provide security. Nor was it contended that they were not in a position to do so with the consequence that the making of an order for security would be oppressive because it would prevent the prosecution of a reasonably arguable claim. 60In these circumstances, an order for security should be made and should be in respect of costs incurred after the date of the orders of this Court. 61BARRETT JA: I agree with Beazley JA.

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: 08 August 2012