Yes Home Loans Pty Ltd & Anor v AFIG Wholesale Pty Ltd & Anor

Yes Home Loans Pty Ltd & Anor v AFIG Wholesale Pty Ltd & Anor - [2008] NSWSC 1017 - NSWSC 2008 case summary — Zoe

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JUDGMENT The proceedings 1 The proceedings which give rise to the current notices of motion are brought by the plaintiffs: Yes Home Loans Pty Ltd ("YHL") and Mortgage Management Corporation Pty Ltd ("MMC"). The plaintiffs are mortgage managers, who develop loan products and sell those products to the general public [using funds provided by wholesale funders], and then manage the loans throughout the life of the loan. 2 The plaintiffs' relationship with the second defendant, Australian Mortgage Securities Pty Limited ("AMS"), dates back to 1 September 1999 when they executed a Correspondent Deed. 3 The defendants [AMS and AFIG Wholesale Pty Ltd trading as GE Money] are wholesale funders who since approximately 2006 have formed part of the multi-national GE Group of companies ("the GE Group"). 4 In broad terms the Correspondent Deed sets out the terms and conditions upon which the plaintiffs as 'the Correspondent' agree to exercise certain powers and discretions and to perform certain obligations in relation to the origination and management of loans and mortgages. The Correspondent Deed runs for 30 pages and includes numerous obligations of the first and second plaintiffs together described as "the Correspondent". 5 In the case of wholesale funds provided by the defendants prior to late 2006, the "lender" or mortgagee was Permanent Custodians Ltd ("PCL") in its capacity as trustee of a securitisation programme known as ARMS II. Since that time the lender has been another company within the GE Group, GEL Custodians Pty Limited ("GEL Custodians") in its capacity as trustee of a securitisation programme known as ARMS III. 6 The defendants are the appointed trust managers of the securitisation programmes. 7 On an overview basis the proceedings concern the respective rights and obligations of the parties in relation to the Correspondence Deed and a number of ancillary instruments including charges. 8 The claims pursued include claims for relief against penalties and forfeiture, breach of contract, and breach of s12CC of the Australian Securities and Investments Commission Act 2001 ["ASIC Act"] and s51AC of the Trade Practices Act 1974 ["TPA"] . The present state of the proceedings 9 Currently the plaintiffs' summons has been served but no statement of claim or equivalent has been served. The plaintiffs having commenced the proceedings as Equity proceedings have indicated that at an appropriate time they may well seek to have the proceedings transferred to the Commercial List. 10 The orders sought include:

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23 While since October 2007, the plaintiffs have not arranged any new loans using wholesale funds provided by the defendants, the portfolio of loans placed with the defendants prior to that date ("the GE portfolio"), is substantial. It appears that there are more than 889 such loans - 569 originated by YHL and 320 originated by MMC, and that the total outstanding loan funds in relation to those loans amounts to $228,176,179.33. It follows that the trail commission is calculated with reference to loan funds in that order. 24 While it varies from month to month, the plaintiffs' entitlement to trail commission from the GE portfolio is claimed to be in the order of $80,000 per month. The amount actually paid by the defendants to the plaintiffs (pursuant to undertakings given to the Court) in August 2008 in respect of the month of July 2008 was $69,124.61, and the amount paid to the plaintiffs on 9 September 2008 in respect of 75% of their entitlement for August 2008 was $60,000. 25 On 6 June 2008 the defendants advised the plaintiffs that they proposed from July 2008 to withhold 75% of the plaintiffs' trail pending actual PI claim payments. Despite the plaintiffs' protestations, on 9 July 2008 the defendants withheld 75% of the plaintiffs' June 2008 trail commission "as per legal advice". While it is clear from the three Notices to Indemnify issued that it is only in respect of the Kontos claim that the defendants claim that MMC has breached the Correspondent Deed, it appears that 75% of each of YHL and MMC's trail was withheld. 26 These proceedings were commenced on 31 July 2008 and as a consequence of certain undertakings to the Court by the defendants, the plaintiffs have been paid 100% of their trail commission for the month of July 2008 (in two instalments on 10 August 2008 and 27 August 2008) and 75% of those entitlements for the month of August 2008. The next payment date is on 10 October 2008 and no undertaking has been forthcoming from the defendants in respect of that payment and future payments.

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27 The amounts concerned are not trifling - Ms Leckovski's estimate is that future servicing and other fees payable to the plaintiffs by the defendants amount to between $1,901,848 and $2,054,119, although two days later she revised downwards that estimate to between $1,627,978 and $1,962,794. 28 Mr Boueri's evidence is that the trail commission is necessary in order to meet the plaintiffs' operating expenses. The estimate provided by Mr Boueri in his second affidavit of the plaintiffs' expenses for the month of September 2008 demonstrates that if the plaintiffs receive 100% of their commission entitlements from the defendants, then the plaintiffs' income will exceed their anticipated expenses. 29 If, however, the defendants refuse to pay the plaintiffs' commission entitlements then the plaintiffs' anticipated expenses will exceed the plaintiffs' income for the month. The plaintiffs do not have a loan facility which can be used for the payment of their operating expenses in the period leading up to the trial of these proceedings. The amounts already loaned by Mr Boueri and his family interests to the plaintiffs are considerable, and the evidence is that there is significant doubt about whether any further funds will be advanced. 30 The evidence of Mr Boueri is that the withholding of trail commission on an indefinite basis will have a devastating impact upon the plaintiffs' business. The plaintiffs' evidence led on the notice of motion was to the effect that its entitlement to trail commission from the defendants represents more than 50% of its expected revenue, which is necessary to meet its day to day operating costs. 31 The contention is that the plaintiffs are likely to suffer injury for which damages will not be an adequate remedy if relief is not granted, as the trailer commission is necessary to discharge the plaintiffs' ordinary operating costs. The contention is that the grant of the relief sought would not be akin to final relief, because the order sought is for a limited time, that is, until final hearing or other order of the Court, and the plaintiffs have a substantial claim for damages in the proceedings. Accrued right to trailer commission Integral Home Loans Pty Limited 32 In Integral Home Loans Pty Limited v Interstar Wholesale Finance Pty Limited [2007] NSWSC 406 at [74], Brereton J held that:

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iii. a host of procedures that have to be complied with in relation to a prospective application by a borrower : this being the level at which the plaintiffs come in. 40 The money received by the trustee is interest income plus the repayment of principal. The interest income is dependent upon the terms of the specific loan and mortgage between the trustee and the borrower. Each loan and mortgage can only go ahead if there is 100 percent Lenders Mortgage Insurance. The intent is to seek to replenish the trust if the borrower defaults and there is a relevant sale and shortfall. If the Lenders Mortgage Insurance fails to attach, one still has a relevant loss of principal and interest income from an impecunious borrower. That is a loss that has to be restored to the trust. The trust manager's obligation at clause 11.18 of the Master Trust deed requires that manager [subject to clause 10.4] to be liable for the acts or omissions of any officer, employee, attorney, agent, sub delegate or sub agent to whom any delegation is made and the fees and expenses of any such person. The trust manager has a separate obligation under the MOSA. Those obligations are in turn mirrored in the Correspondent Deed in the operations manual. 41 In the result it is important to be clear that the proper construction of the Correspondent Deed and other associated instruments requires one to understand the relationships set up by the whole of the complex of arrangements. There are many places within the Correspondent Deed where cross-references are given to the master trust deed and to the operations manual. One is dealing with an interlocking set of arrangements necessary to be carefully understood when dealing with the realistic construction of the indemnity and other provisions in those instruments. 42 The parties to the Master Trust Deed [MTD] made on 7 March 1995 were PCL and the second defendant. 43 The parties to the Master Origination and Service and Agreement [MOSA] were PCL as the trustee and the second defendant [AMS]. One has to keep in mind that the early situation involved the master servicer being the same entity as the trust manager. The general intent was to identify a number of particular obligations of the master servicer. When the Correspondent Deed is examined with care it becomes plain that the deed contains an admixture of the Master Trust Deed and the MOSA. 44 For present purposes sufficient has been outlined of the general manner in which the subject trusts were entered into, to permit the diagrammatic representation of the changing picture to be included. Diagrammatic representation of the ARMS II and later ARMS III programs 45 The following diagrams represent the structure of the ARMS II and ARMS III programs at various stages: Diagram 1: The structure in place at the time the Correspondent Deed was entered into in September 1999. Diagram 2: The structure after the re-statement and amendment of the terms of the MTD on 9 December 2003. Diagram 3: The structure after the first AFIG Operations Manual is introduced in March 2004. Diagram 4: The structure after YHL and MMC are introduced to the super partnership program in 2005. Diagram 5: The structure after GEL Custodians replaces PCL as the trustee of the ARMS II funds in May 2006, and the new ARMS III program is created. Diagram 6: The structure from December 2006, when AFIG replaced AMS as the trust manager and master servicer under the ARMS II and ARMS III programs.

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Subject to clauses 6.1(b), 7.2(b) and 7.3(a) and in the event where the Lender exercises its rights under clause 9.2, 12.2 or 13.2 , the Lender, at its discretion, may at any time and from time to time, without notice to the Borrower or any Guarantor, deduct from and retain out of any credit balance in any currency in any account of the Borrower or any Guarantor or both with the Lender any amount as the Lender thinks fit and apply it towards satisfaction of all or any monies or amounts falling within the description of "Principal Outstanding" or "Guaranteed Obligations". The Lender agrees to notify the Borrower or the Guarantor (as the case may be) after any set-off and application, but failure to give notice does not affect the validity of set-off and application. The rights of this Lender under this clause 17.7 are in addition to other rights and remedies (including, but not limited to, other rights of set-off) which the Lender may have." 68 While it is clear that the defendants agreed to (and did) amend the set off clause in the Loan Agreement, no amendment was made to the equivalent provision in the Deeds of Charge. Mr Boueri claims that he did not notice that the set-off clauses were different, and proceeded to execute the Deeds of Charge and the Loan Agreement. The difference between the set-off clause in the Loan Agreement and the set-off clause in the Deeds of Charge is that under the Loan Agreement AMS has only a qualified right to set-off funds standing to the credit of the borrower against monies said to be outstanding. 69 Mr Boueri's evidence is that at the time he executed the Deeds of Charge he understood that the charge was security for the AFIG Loan. Had he known that the defendants would seek to set-off the plaintiffs' margin payments against monies allegedly owing by the plaintiffs under the Correspondent Deed or against any loss the defendants may suffer in the future as a consequence of loans arranged by the plaintiffs going into default, he asserts that he would not have executed the Deeds of Charge. 70 The loan funds of $1.5 million were advanced in 6 instalments and 'repayments' were made by way of the defendants deducting principal and interest from the trail otherwise payable to the plaintiffs. This practice continued up until around 10 April 2008. 71 According to documents provided to the plaintiffs by the defendants in late 2007, the AFIG Loan was due to be paid off after the "repayment" on 10 April 2008. On 1 May 2008 Mr Boueri requested that the charge be released on the basis that the AFIG Loan had been repaid in full. On 12 May 2008 the defendants confirmed to Mr Boueri in writing that the AFIG Loan had been repaid in full. Up until the commencement of these proceedings the parties both acted on the assumption that the AFIG loan had been repaid in full on or about 10 April 2008. 72 However subsequent to the commencement of these proceedings the defendants changed their position and now maintain that principal of $50,000 plus $9,619.13 in interest remains outstanding under the AFIG loan. The defendants' change of position is said by the plaintiffs to be significant because it is common ground that despite Mr Boueri's request on 1 May 2008 that AMS execute a discharge of the charged property, AMS has not done so and now purports to exercise various powers granted to it under the Deeds of Charge. AMS is obliged under clause 15.9 of the Deeds of Charge to discharge the Charged Property on the plaintiffs' request if there are no "Moneys Owing". 73 It is clear that the task of reconciling deductions made from trail by way of 'repayment' is a complex one. The defendants' financial controller, Mr Burge, annexes 1000 pages of documents to his affidavit to explain the defendants' change of position, and the plaintiffs have to date been unable to satisfy themselves one way or another. However Mr Boueri gave evidence that had he been told in April - May 2008 by the defendants that an amount of approximately $59,000 was still owing under the AFIG Loan he would have repaid it so that the charge could be released. He claims to have assumed until after the commencement of the proceedings that the AFIG loan had been repaid in full. Notices to Indemnify

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74 On 30 April 2007 the defendants issued a Notice to Indemnify ("the First Notice to Indemnify") to YHL and MMC in relation to a loan made to a borrower known as Mr J Kontos. The First Notice to Indemnify asserts that in arranging the loan to Kontos, YHL and MMC breached certain of the representations and warranties specified in clause 12.1 of the Correspondent Deed, as a result of which the liability of the lenders mortgage insurer, Genworth Financial Inc ("Genworth"), is being avoided. The First Notice to Indemnify sought pursuant to clause 13.2 of the Correspondent Deed that the plaintiffs' indemnify the defendants for all Costs and Expenses which the defendants will or have suffered as a result of and in connection with those defaults in the amount of $224,838.53 by paying that amount within 30 days into a Westpac account in the name of GEL Custodians Warehouse. 75 Shortly after the issue of the Notice to Indemnify Ms Meade of the defendants is said to have assured the plaintiffs that it was "just a formality" and that the plaintiffs should not worry about it. The plaintiffs claim to have relied upon this statement and took no action. However at a meeting in June 2007 the defendants told the plaintiffs that by reason of their failure to pay the Kontos sum the defendants considered that there had been a "technical default" which entitled them to appropriate for their own benefit monies belonging to the plaintiffs. 76 On 8 May 2008 a second Notice to Indemnify was issued to YHL in respect of 8 additional loans and on 29 May 2008 a third Notice to Indemnify was issued to YHL in respect of two further loans. In the second and third Notices to Indemnify the defendants required that YHL indemnify them for all Costs and Expenses which the defendants will suffer or have suffered as a result of and in connection with breaches of the Correspondent Deed and the liability of the lender's mortgage insurer being reduced, limited or avoided. The defendants also contended that they had incurred costs and expenses as a result of the negligent performance by YHL of its duties and by certain breaches of the Trade Practices Act 1974 ("the TPA") and the Australian Securities and Investments Commission Act 2001 ("the ASIC Act"). 77 The total amounts claimed in the three Notices to Indemnify in respect of the 11 loans is $1,353,206. The amounts claimed are not the subject of any adjudication by a court. The defendants have been reluctant to provide to the plaintiffs any details of the "claims" or the documents relating to the borrowers' defaults. Additionally, where information has been provided by the defendants they have done so on a without prejudice basis, for reasons which remain unexplained. 78 In the period since June 2007 the plaintiffs' requested on a number of occasions that the defendants provide them with the relevant correspondence from their loans department as well as a breakdown of costs that had been charged (both legal and internal) in relation to the 11 loans and any other "bad" loans. However the defendants declined to provide that information. As at the date these proceedings were commenced the plaintiffs' had not been provided with any details of how those figures were derived. As the general manager of the plaintiffs' articulated the position to Ms Meade of the defendants on 19 September 2007:

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(e) on 16 June 2008 Genworth advised the defendants that the claim had been denied - " We are of the view that material misrepresentations have been made in connection with the process of validation of the loan application details, and the compliance of the loan the subject of the Policy with AFIG lending guidelines, operations manual and related policies and procedures" . 83 It is apparent from the documents referred to above that the amount claimed in the Notice to Indemnify in relation to the Foka loan ($139,811.60) includes the amount of the capital loss on the resale of the property, the costs associated with that resale and interest both up to the date of settlement in respect of the amount outstanding, plus interest accruing after settlement. It seems clear that the amount of interest claimed pre-settlement is substantial - the statement of account records interest charged between 26 April 2005 and 1 July 2005 of $4,659.90, interest charged between 1 July 2005 and 26 June 2006 of $27,842.67, interest of $2,408.67 charged on 26 July 2006 and interest of $2,685.76 charged on 28 August 2006, a total of $37,597. The sum of $37,597 (interest pre-settlement) and $17,914.42 (interest post issue of the Notice to Indemnify), is $55,511.42. In other words, approximately 39.7% of the amount claimed in the Notice to Indemnify ($139,811.60) is referable to interest. 84 It also appears that a significant amount of interest has also been claimed in relation to the other 10 loans. As discussed below this raises various issues, including whether interest is a "Cost and Expense" as that term is defined in the Correspondent Deed. Sale of Resimac book 85 In mid 2007 the plaintiffs conducted negotiations with an arms length purchaser in respect of a part of its loan book known as the Resimac book. As a condition of the defendants' consent to that sale, an agreement was reached between the parties whereby 100% of the sale proceeds were to be provided to the defendants at settlement. That agreement is recorded in an email sent by Mr Rice of the first defendant to Ms Bonser of the plaintiffs on 27 June 2007 in the following terms:

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Remaining proceeds will be placed in a trust a/c, pending the resolution of the remaining outstanding issues - Kontos, partial/total sale of AFIG book. We will hold over a decision on where the proceeds are paid until these items are resolved." 86 The reference to the "superannuation accounts" is a reference to a liability to the Australian Taxation Office ("ATO"). In October 2007 the plaintiffs sent a statement received from the ATO in respect of a liability to make superannuation contributions of its wholly owned subsidiary, Yes Group Pty Limited ("Yes Group"), in the amount of $157,007.92, and requested that the defendants discharge that liability from the funds held in trust. 87 On 15 October 2007 Mr Dwyer of the first defendant acknowledged that the defendants had received sums totalling $336,308.51 by way of 100% of the proceeds of the sale of the Resimac book. However he denied that the outstanding superannuation guarantee payment for Yes Group was a liability they were contractually or legally bound to make. He asserted (erroneously) that Yes Group was a company outside the corporate group headed by YHL. Further, Mr Dwyer asserted that the first defendant had a legal entitlement to retain on trust the amount of $224,838.53 (representing the sum sought in the first Notice to Indemnify), but agreed to release the balance of $52,591.52. 88 As a consequence of the first defendant's failure to pay the Yes Group superannuation account the plaintiffs had to enter into an arrangement with the ATO to discharge that superannuation liability. The monthly income generated by the Resimac book, namely approximately $20,000, was also forfeited. 89 While the arrangement between the parties was to pay the superannuation accounts and place the remaining funds in a trust account pending resolution of outstanding issues, the funds were in fact paid initially into an account in the name of GEL Custodians and subsequently into a general operating account of AMS. It is common ground that those funds were then applied by AMS for their own benefit. The defendants seek a declaration in the proceedings that "AMS and/or AFIG, as they were entitled to do, discharged YHL's and MMC's liability for the Kontos Amount from the Resimac Amount." The plaintiffs' dispute that they had such an entitlement. It would seem at the very least that in "discharging YHL/MMC's liability for the Kontos amount" the defendants have appropriated monies representing interest payable by the borrower but unpaid, which the plaintiffs have no liability to pay. Notices under Deeds of Charge 90 On 2 September 2008 AMS issued a Certificate of Indebtedness and Notice under Deed of Charge to both YHL and MMC. The Certificate of Indebtedness asserted that under clause 15.12 of the Charge the amount of the Moneys Owing as at 31 July 2008 was $2,932,486.27, comprising:

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(c) $1,617,061.16 under "Working Capital Loans". 91 The Certificates also asserted that each of those amounts fell within the definition of "Moneys Owing" in the Deeds of Charge. 92 On the same date AMS gave notice to the plaintiffs that it converted the floating charge to a fixed charge in relation to all rights or entitlements to servicing and other fees payable by the defendants ("the Proceeds") under clause 3.3 of the Deeds of Charge, and directed under clause 3.6(a) that any Proceeds received by the defendants be paid into an account in the name of GEL Custodians Warehouse. 93 On 3 September 2008 AMS issued further Notices under the Deeds of Charge to the plaintiffs converting the floating charge to a fixed charge in respect of all rights and entitlements which the plaintiffs have as insureds under any insurance contract with QBE Insurance (Australia) Limited ("QBE") and directed that any payment made by or on behalf of QBE for the benefit of the plaintiffs be paid into the account in the name of GEL Custodians Warehouse. 94 The amount of $59,699.13 said to be owing under the Loan Agreement relates to the AFIG Loan. As set out above, it represents a change of position on the defendants' part after the commencement of these proceedings. The amount of $1,255,725.88 said to be owing under "defaulting mortgages" is unparticularised and its' make up is unclear. Even if one accepts that the defendants have applied $224,838.53 of trust funds towards the Kontos claim the amounts do not marry. 95 The first time the defendants claimed that monies were payable to them by the plaintiffs in respect of "Working Capital Loans" was when the third affidavit of Mr Burge (sworn on 29 August 2008) was served. Mr Burge asserts that as at 31 July 2008, the plaintiffs owed AMS $1,617,061.16 in respect of all Working Capital Loans ("WC Loans"). The total amount of $1,617,061.16 is said to comprise $1,111,699.03 owing by YHL and $505,362.13 owing by MMC. 96 There is no dispute that one of the categories of remuneration the plaintiffs have received from the defendants over many years is in the form of a lump sum paid at the time an individual loan was taken out, described by Mr Boueri as "upfronts". That amount was calculated as a percentage of the loan amount and was effectively an upfront payment of margin as the subsidy account was "repaid" by the plaintiffs receiving a smaller margin over the life of the loan than would otherwise be payable. However there is a dispute between the parties as to whether the total amount of upfronts paid to the plaintiffs are repayable to the defendants by the plaintiffs, and whether they can be characterised as "Moneys Owing" under the Deeds of Charge. 97 The pricing structure provided by AMS to YHL on 20 June 2001 provides that the subsidy account is closed upon the earlier of repayment of the outstanding balance in the subsidy account, discharge of the loan or 5 years from the anniversary of settlement of the loan. Mr Burge accepts that a write off occurs where the borrowers' loan is discharged prior to the full amount of the related WC Loans to the plaintiffs being repaid together with interest charged thereon. 98 In other words, while the defendants now seek to characterise the upfronts as "loans", the plaintiffs contend that they are not loans because the plaintiffs are under no legal liability to repay those amounts. Rather the plaintiffs have agreed to accept a lesser amount of margin in respect of those borrowers for a fixed period of time. If at the expiry of that period an amount is still outstanding, the "loan" is written off. If the loan is discharged by the borrower within the first 5 years then the borrower must pay a deferred establishment fee and the subsidy account is closed. Notice of termination 99 At 8.09pm on 3 September 2008 (the night before the plaintiffs' Notice of Motion was returnable in the Duty Judge list) the defendants served a Notice of Termination on the plaintiffs. The Notice of Termination purports to terminate the Correspondent Deed (as to both origination and management of mortgages) immediately, pursuant to clause 16.2. 100 The Notice of Termination asserts that the plaintiffs have breached their obligations under the Correspondent Deed, have engaged in misleading and deceptive conduct and have made false representations in breach of the TPA and the ASIC Act, have failed to comply with their obligation to indemnify AMS pursuant to the second and third Notices to Indemnify, have committed fraudulent and deliberate breaches of the Correspondent Deed, and by the occurrence of an Event of Insolvency. These allegations (even the allegation that the plaintiffs have engaged in fraudulent activity) are unparticularised. 101 The Notice of Termination directed that the books and records of the plaintiffs be delivered up to the defendants, and notified the plaintiffs that pursuant to clause 16.3(b) of the Correspondent Deed, the plaintiffs would not be entitled to receive any further servicing and origination or other fees referred to in clause 15.1 of the Deed. The Notice of Termination also provided that in the event that it was determined by a Court that (contrary to clause 16.3(b)) that the plaintiffs were entitled to receive further servicing and other fees, notice was given that AMS was entitled to and would set off against such further servicing and other fees the claims which the defendants have or may have against the plaintiffs in respect of the breaches of the Correspondent Deed and such other claims as the defendants may have against the plaintiffs including but not limited to those arising under the APSonline Indemnity dated 12 December 2005, the Loan Agreement and the Deeds of Charge. Applications for mandatory injunctive relief - the principles 102 I turn to briefly examine the principles applicable to the grant of mandatory injunctions. 103 Meagher, Gummow and Lehane, Equity Doctrines and Remedies , 4th Edition by Meagher, Heydon and Leeming at [21-395] comment as follows:

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viii. the defendants' own evidence is that the GE portfolio carries with it an entitlement to trailer commission in the vicinity of $1.545 million to $1.824 million. 122 In my view there are high question marks as to the plaintiffs' financial position which in the current environment does appear to be stressed. However the existence of this litigation and the defendants' actions in enforcing what it believes to be its contractual rights have likely contributed if not exclusively, at least significantly, to the straightened circumstances of the plaintiffs. 123 The defendants' own conduct and their own evidence is corroborative of Mr Boueri's belief that the GE portfolio may conceivably have an underlying value of more than $1.5 million. 124 The plaintiffs have sold two of their loan books in the past 18 months for an amount totalling approximately $700,000. The evidence is that the industry values a loan book according to its annualised trail. The loan books are likely a valuable commodity. 125 The other loan books have not been beset with large numbers of claims declined by the mortgage insurer. Since 1999, other than in relation to the 11 loans the subject of these proceedings only two claims had been denied by a mortgage insurer in respect of the plaintiffs' portfolios. In circumstances where the other loan books comprise approximately 600 loans and the GE portfolio approximately 1000 loans, the disparity between the claims experience arising out of the GE portfolio and the claims experience arising out of the other portfolios is remarkable. 126 It has to be recalled that the plaintiffs have had the benefit of insurance policies with QBE each with the Policy limit of $2,000,000. The insurer's recent grant of indemnity to the plaintiffs in respect of the 11 loans as well as a number of other claims notified in the policy period provides an indemnity which extends to the plaintiffs' costs of these proceedings. This indemnity also extends to any amount the plaintiffs are ordered to pay in respect of the defendants' costs of the proceedings. Of course the grant of indemnity remains conditional on the claims not being excluded by reason of specific policy conditions. 127 To the extent that a party asserts that an order that security be provided would stultify the proceedings, it must satisfy the Court that those who stand behind it or stand to benefit from its success in the proceedings are unable to provide security for costs: Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 at [66]. "A proceeding cannot be regarded as stultified unless those who stand behind the impecunious plaintiff are unable (not unwilling) to provide the requisite security for costs."

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iii. JJL (the sole shareholder of YHL) has, in its capacity as trustee of the discretionary family trust, equity in the plaintiffs' business premises at Chatswood and an investment property in Parramatta. 129 One then turns to the extent to which it is reasonable to expect those standing behind the plaintiffs to satisfy an order for security. As stated in KP Cable Investments Pty Ltd v Metglow Pty Ltd (1995) 56 FCR 189, the Court typically takes into account in determining an application for security for costs whether " there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security ." 130 This principle has been applied in a number of cases, including: Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 at 123: "… a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors)…" Green (in his capacity as liquidator of Arimco Mining Pty Ltd (in liq) v CGU Insurance Ltd) [2008] NSWSC 449 at [12]: "An important factor informing the exercise of the discretion is the existence of persons who stand behind an impecunious plaintiff who seek to take the benefit of our system of justice (ie share of the proceeds of victory) without the corresponding burden (ie, a potential adverse costs order)." Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at [83]: "It would be unrealistic for the court to decline to order security on the ground that to do so would stultify the litigation, if it took into account only the financial ability of the plaintiff and disregarded the financial ability of those who would benefit from the plaintiff's success and who would therefore have an economic incentive to bear the burden of a security order. More broadly, it is fair for the courts to proceed on a basis which reflects the proposition that those who seek to benefit from litigation should bear the risks and burdens that the process entails. That notion appealed to Young CJ in Eq in Chartspike Pty Ltd (in liq) v Chahoud [2001] NSWSC 585 at [5], where his Honour observed that where a plaintiff contracts to have the litigation funded by a third party, in return for the third party receiving a share of the verdict, "it is appropriate that the third party bear part of the risk."" Section 1335(1) of the Corporations Act 2001

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"[M]andatory injunctions generally carry a higher risk of injustice if granted at the interlocutory stage [because]: they usually go further than the preservation of the status quo by requiring a party to take some new positive step or undo what he has done in the past; an order requiring a party to take positive steps usually causes more waste of time and money if it turns out to have been wrongly granted than an order which merely causes delay by restraining him from doing something which it appears at the trial he was entitled to do; a mandatory order usually gives a party the whole of the relief which he claims in the writ and makes it unlikely that there will be a trial .… An order requiring someone to do something is usually perceived as a more intrusive exercise of the coercive power of the state than an order requiring him temporarily to refrain from action. The court is therefore more reluctant to make such an order against a party who has not had the protection of a full hearing at trial". 154 The finding is that the plaintiffs have shown a degree of probability of likelihood of success as is sufficient to warrant the interlocutory regime outlined below. In my view the plaintiffs have discharged the onus upon them of demonstrating the requisite degree of likelihood of success: namely " that which the Court thinks sufficient in the particular case to warrant consideration of where the balance of convenience lies ": cf McLelland J in Appleton Papers Inc at 214. 155 Naturally the Court always strains, wherever possible, to ensure that a party be permitted to have a final hearing if the serious case and balance of convenience factors are seen to be satisfied. 156 I am satisfied that the principled exercise of the discretion is to grant the form of relief outlined in the defendants' final offer, save that the amounts to be paid by the defendants to the plaintiffs [of the servicing and other fees referable to loans originated and managed by the plaintiffs] are to be the fixed monthly figure of $40,000. Each of the other conditions defined by the defendants' final offer [including each of the undertakings sought in sub clause D] will require to be included. Decision in respect of security for costs 157 The principled exercise of the relevant discretion is heavily influenced by QBE's confirmation of indemnity to the plaintiffs. However the Court must also pay due regard to the express terms set out in paragraphs 3 and 4 of Exhibit P 3. 158 Another matter which requires to be taken into account concerns the part which the defendants had themselves played in the general perception of the plaintiffs' financial position, by their role in withholding percentages of the plaintiffs' trail commission. 159 Yet another consideration inheres in the fact that as yet neither of the combatants have properly pleaded: hence the difficulties for the Court in ascertaining what types of amount of legal costs the defendants are likely to incur, bearing in mind also that the defendants are cross claimants in their own right. 160 I have already made clear that Mr Boueri will be required to give undertakings to the Court [in terms of the undertaking sought by the defendants in exhibit D2]. Those undertakings and in particular that referred to in clause D (V) are calculated to further ensure that the defendants are not out of pocket in terms of their reasonable fees incurred in the litigation. 161 In addition the plaintiffs are, on or before January 10 2009, to provide $40,000 by way of security for costs paid into Court by bank guarantee or monetary deposit. 162 Subject to those matters no further security for costs orders are presently appropriate. Short minutes of order 163 The parties are to bring in short minutes of order. ******************

At a glance

Court

Decision date

Before

Source

Judgment (224 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (14)

Cited By (1)