Andrews v Zuccubarr Pty Ltd
[2020] VSC 675
•15 October 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROPERTY LIST
S ECI 2018 01420
| GREGORY STUART ANDREWS (in his capacity as Liquidator of Garland Projects Pty Ltd (ACN 156 037 848)) & ANOR (according to the Schedule attached) | Plaintiffs |
| v | |
| ZUCCUBARR PTY LTD (ACN 006 062 719) & ORS (according to the Schedule attached) | Defendants |
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JUDGE: | Derham AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 30 June 2020 |
DATE OF JUDGMENT: | 15 October 2020 |
CASE MAY BE CITED AS: | Andrews & Anor v Zuccubarr Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2020] VSC 675 |
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PRACTICE AND PROCEDURE – Security for costs – Whether there is reason to believe that the Company plaintiff will be unable to pay the costs of the Mortgagee defendants if they are successful – Whether plaintiff’s impecuniosity may have been caused or contributed to by the applicants for security – Whether an order for security would stultify the prosecution of the proceeding – Whether security for costs should be refused on the ground of the delay in bringing the applications for security and the consequent prejudice to the plaintiffs – Supreme Court (General Civil Procedure) Rules 2015, rr 62.02(1), 62.04 – Corporations Act 2001 (Cth), s 1335(1).
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APPEARANCES: | Counsel | Solicitors |
| For the First and Second Plaintiffs | Mr DF McAloon | Cornwalls |
| For the Sixth Defendants | Mr B Carew | Harding Stenning & Co Lawyers |
| For the Seventh Defendants | Mr B Carew | Velos Lawyers |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 1
Background......................................................................................................................................... 1
Procedural history.............................................................................................................................. 3
Affidavit evidence............................................................................................................................. 8
The claims and defences................................................................................................................. 12
Company’s claims....................................................................................................................... 12
Mortgagee defendant’s defences and counterclaims............................................................. 15
Velos cross-examination................................................................................................................. 17
Mr Velos’s evidence.......................................................................................................... 20
Applicable law.................................................................................................................................. 25
Submissions and Consideration................................................................................................... 28
Impecuniosity.............................................................................................................................. 28
Submissions........................................................................................................................ 28
Consideration..................................................................................................................... 30
Prospects of success.................................................................................................................... 33
Whether that the Mortgagee defendants have caused or contributed to financial position of Garland................................................................................................................................ 34
Submissions........................................................................................................................ 34
Consideration..................................................................................................................... 35
Whether the order for security will or may stultify the claim by Garland against the Mortgagee defendants.......................................................................................................................... 36
Submissions........................................................................................................................ 36
Consideration..................................................................................................................... 38
Delay............................................................................................................................................. 41
Submissions........................................................................................................................ 41
Consideration..................................................................................................................... 43
Conclusion......................................................................................................................................... 45
HIS HONOUR:
Introduction
The sixth and seventh defendants (Mortgagee defendants) apply for security for their costs of the proceeding from the second plaintiff (Garland) pursuant to r 62.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (Rules) and s 1335 of the Corporations Act 2001 (Cth).[1]
[1]The sixth defendants summons was filed on 25 May 2020 and is supported by the affidavit of the solicitor, Roy James Stenning made 25 May 2020 (Stenning affidavit). The seventh defendants’ summons was filed on 19 May 2020 and is supported by the affidavit of Bill Velos made 15 May 2020 (Velos affidavit)
For the reasons set out below, I have decided that there should be no order made for security for the Mortgagee defendants’ costs in the event that they are successful.
Background
Garland was developer of an apartment building called ‘The Atrium’ at 193 - 195 Springvale Road, Nunawading, Victoria (Atrium). Garland was ordered to be wound up by order of the Federal Court of Australia on 6 July 2018 and the first plaintiff (Liquidator) was appointed liquidator.[2]
[2]Proceeding No VID 303 of 2018.
The completed Atrium was subdivided into lots comprising 86 apartments, a supermarket/cafe, and an office with two levels of basement car parking. The Mortgagee defendants were mortgagees of many lots in the Atrium. By April 2018, 60 of the 86 apartments and the office in the Atrium were successfully sold. The supermarket/cafe had been leased but its freehold remained unsold. Garland was the sole registered proprietor of a number of apartments most of which were subject to mortgages to either the sixth or the seventh defendants.
The Mortgagee defendants, as mortgagees of a number of lots in the Atrium, had engaged Paytons Securities Ltd (Paytons Securities) to manage the mortgages. The sixth defendants’ mortgages were effectively controlled by Mr Bill Velos of Velos Lawyers. The Mortgagee defendants generally used Paytons Property Pty Ltd (Payton Property) to sell mortgaged lots.
This proceeding began on 17 September 2018 as an application by the Liquidator for the removal of caveats lodged on the titles to lots in the Atrium.[3] At the time of the application to remove the caveats, the Mortgagee defendants had taken possession of the mortgaged apartments and were proposing to conduct mortgagees’ sales. The analysis undertaken by the Liquidator showed that there would be a surplus of funds following the sales.
[3]The application was made by originating motion filed on 18 September 2018 pursuant to s 90(3) of the Transfer of Land Act 1958 (Vic).
By order made on 9 October 2018 (October 2018 Order), Garde J ordered the removal of a number of caveats lodged against title to apartments by the first to third defendants and then ordered the Applicants to remit to the Liquidator all net proceeds of the sale of the mortgaged lots (after discharge of the amount secured by any registered mortgages and payment of statutory charges and reasonable selling costs[4]). The order went on to provide that all amounts received by the Liquidator or by Garland in respect of the sale of any of the land contained in the relevant certificates of title were to be held in an interest-bearing trust account in the name of the Liquidator’s solicitors, were to be recorded in a ledger identifying each remittance by reference to the individual parcels of land, the amount received in respect of each individual parcel of land, and the amount remitted to the plaintiff in respect of each individual parcel of land and were not to be disbursed until further order or written consent of the plaintiff and the first, second and third defendants (Retained Funds).
[4]Those selling costs were not to include the amounts claimed by the second defendant pursuant to the agency agreements dated 26 February 2016 and 28 November 2017.
Although the October 2018 Order did not expressly provide that the Retained Funds were security for the claims made by the first, second and third defendants and Garland (in liquidation), that is plainly the intent, and the accepted intent, of it.
After the making of the October 2018 Order, the Mortgagee defendants sold the lots in the Atrium over which they held mortgages. These mortgagees’ sales were reported to the Liquidator, and the net proceeds were progressively paid to, and retained by, his solicitor pursuant to the October 2018 Order.
Procedural history
In early 2019, after some adjournments, the further conduct of the proceeding was referred to Matthews JR who listed the proceeding for direction on 23 August 2019. In the lead up to that hearing, the plaintiff’s solicitor filed an affidavit of Stephanie Kate Davies made on 22 August 2019 that gives an account of concerns the Liquidator had as to the amounts of commission and costs deducted from the proceeds of the mortgagees sales of properties in the Atrium undertaken by the sixth and seventh defendants. Orders were made on 23 August 2019, in summary, as follows:
(a) for persons with claims on the Retained Funds to enter an appearance (if they had not by then) and to file and serve an affidavit verifying their claims;
(b) for the Liquidator to serve relevant documents on any person he identified as claimants on the retained funds;
(c) adjourned the proceeding to 6 September 2019 to deal with orders proposed by the Liquidator as to the extent of compliance by the Mortgagee defendants with the October 2018 Order and the payment of the Liquidator’s fees and costs out of the Retained Funds.
In the lead up to the hearing on 6 September 2019, the Liquidator filed an affidavit that showed that:
(a) As at 5 September 2019, the Liquidator held Retained Funds of $1,533,801.94 (including funds that had been remitted by the Mortgagee defendants pursuant to the October 2018 Order).[5]
(b) The assets of Garland were primarily comprised of the Retained Funds.[6]
(c) The Mortgagee defendants maintained the proceeding was ‘spent’
[5]Affidavit of Stephanie Kate Davies made on 5 September 2019.
[6]Affidavit of Stephanie Kate Davies made on 5 September 2019.
At the hearing on 6 September 2019, some orders were sought by consent, and these were included in the order made. They dealt with moneys paid into court in another proceeding in which Garland sought the removal of a caveat over an apartment (lot 304) lodged by Rill Trading Resources Ltd, the third defendant.[7] In that proceeding the caveat was ordered to be removed and the sum of $55,545 was ordered to be paid into court. For some reason this had not occurred and the orders provided for that sum to be paid into the Retained Funds. In addition, the proceeding against the fourth defendant (Teska & Carson Pty Ltd) was dismissed.
[7]Proceeding S CI 2018 01952.
At the hearing, the Liquidator sought orders for production of documents so as to determine whether the deductions made from the proceeds of the sales were reasonable and proper. This included the contracts and agency agreements pursuant to which management fees and sales commissions were paid to Payton Securities and Payton Property, and other relevant documents. The purpose was to enable the Liquidator to satisfy himself that the Mortgagee defendants had acted in accordance with the October 2018 Order.
The Mortgagee defendants contended that the relief sought in the originating motion had been granted, the application was spent and that there was no legal foundation made in the proceeding for the requests for documents. Further, that there was no allegation of a breach of the October 2018 Order and it was Garland and not the Liquidator that was the appropriate person to agitate the issues raised in relation to the payments made into the Retained Funds. Matthews JR, who heard the application, was not in a position to rule on the application where the basis of the application was not clear and nor was the power of the Judicial Registrar to make orders that in substance were orders for discovery.[8] In effect the application was refused.
[8]Gregory Stuart Andrews (in his capacity as Liquidator of Garland Projects Pty Ltd) v Zuccubarr & Ors, S ECI 2018 01420, Transcript, 6 September 2019, p.25.
After the hearing on 6 September 2019, affidavits were filed on behalf of the first and second defendants to substantiate their claims to charges on the Atrium that entitled them to the Retained Funds. An affidavit was also filed by Mr Velos as to the history of the matter, the sale by the seventh defendants of the lots in the Atrium and the remittance of the net proceeds of those sales to the Liquidator. At the conclusion of the affidavit Mr Velos threatened to seek security for the seventh defendants’ costs should the Liquidator pursue his demand for documents and what amounted to the taking of accounts in relation to the sales.[9]
[9]Affidavit of Bill Velos made 4 October 2019.
The proceeding came on for directions on 18 October 2019, at which time Matthews JR ordered by consent that the proceeding against the fifth defendants be dismissed, and that the plaintiff should file a summons to join parties and a statement of claim, so that the proceeding could continue as if commenced by writ.
By summons filed on 11 November 2019, the Liquidator sought to add Garland as second plaintiff and to file a statement of claim (a draft of which was exhibited to an affidavit of the solicitor for the Liquidator). On 10 December 2019, orders were made by consent for the addition of Garland as second defendant, for the filing of the statement of claim and for the proceeding to continue as if commenced by writ. On 20 December 2019, the proceeding as against the third defendant (Rill Trading Resources Pty Ltd) was dismissed by consent.
By 11 March 2020 the remaining active parties, being the first (Zuccubarr), second (Zeninvest), sixth and seventh defendants, had filed their defences, and in the case of the sixth and seventh defendants, counterclaims. On 27 March 2020, directions were given for interlocutory steps, including particulars of pleadings, replies to defences and defences to counterclaims, discovery and mediation. It is significant that it was also ordered that the plaintiff may withdraw $412,084.34 from the Retained Funds to be applied in payment or part payment of Zuccubarr’s claims against Garland, with its costs reserved.
It appears to be acknowledged by the plaintiffs that Zuccubarr had a valid claim upon the Retained Funds. This is because there is no claim raised in the Statement of Claim against it, and the pleading alleges that when Garland recovers from the Mortgagee defendants all the amounts alleged to be due, either on the taking of accounts or as damages and interest (as to which see below), then the Retained Funds should be applied, first, to the Liquidator’s expenses properly incurred in preserving, realising and getting in the Retained Funds and, secondly, in payment of Garland’s indebtedness to Zuccubarr arising pursuant to the Loan Agreement entered into by Garland and Zuccubarr on or about 16 February 2018. In addition, in his Report to Creditors dated 24 May 2019, the Liquidator stated that it would appear that Zuccubarr has a valid and enforceable claim against Garland.[10] This leaves only the second defendant’s claims secured by the Retained Funds and, arguably, the Mortgagee defendants’ claims for costs.
[10]Liquidators Report to Creditors dated 24 May 2019, exhibit BV -1 to the Velos affidavit, [7.9.4].
Pursuant to the orders made on 23 August 2019, by which claimants on the Retained Funds were required to file and serve an affidavit verifying their claims, on 26 September 2019 Zeninvest and Zuccubarr filed an affidavit of Valentino Spyriadis. He gives evidence of the basis for the charges claimed by both Zuccubarr and Zeninvest. The charge in respect of which Zuccubarr lodged its caveat over the Atrium was contained in a Loan agreement dated 16 February 2018. Under that agreement, Zuccubar claimed it was owed $363,502.41 as at 31 August 2019. The payment of $412,084.34 from the Retained Funds authorised by the order of 27 March 2020 would seem, on the face of it, to be full payment of this debt, leaving the Retained Funds substantially free of any claim by Zuccubarr.
By order made on 3 April 2020, Matthews JR authorised the Liquidator to withdraw from the Retained Funds $216,981.66 (such amount being referable to the proceeds of sale of apartment 217, which was not one of the properties the subject of the October 2018 Orders), with such funds to be applied by the Liquidator to meet remuneration, costs and/or expenses of the liquidation of Garland.
The mode of discovery selected was for each party to file and serve a list of the categories of documents that each opposing party should discover, followed by affidavits of documents. By 19 May 2020, when the seventh defendants filed their summons for security for costs, the plaintiff had filed its replies and defences to counterclaim and the parties had filed their desired categories of documents for discovery by the other parties. The seventh defendants’ summons for security for costs was then filed on 25 May 2020.
Both summonses for security for costs were returnable on 11 June 2020. On that day the plaintiffs sought an adjournment because the application by the sixth defendants had not been served until 26 May 2020 and the plaintiffs had not been given sufficient time to respond to the application in circumstances where the litigation was brought in the interests of creditors of Garland and where the outcome of the applications has a direct impact on those interests. The Mortgagee defendants were concerned to advance the applications as quickly as possible and proposed a short timetable. This proved unacceptable to the plaintiffs for a number of significant reasons:
(a) the vast majority of the assets of Garland were comprised of the net proceeds from the sale of the mortgaged apartments in the Atrium held in the Retained Funds. As at 9 June 2020, the amount of Retained Funds (including interest) was $1,406,822.64. Those funds cannot be paid out without the consent of all parties to the proceeding, or by order of the Court. As a result, the Liquidator did not have unilateral recourse to those funds for payment of legal costs incurred in this litigation, and so the Liquidator had been funding the proceeding from his own resources;
(b) given that the proceeding had been brought in the interest of creditors and there was a prospect that the claims will be stultified in the event that an order for security for costs is made, the creditors ought to be given a reasonable opportunity to consider funding the proceeding. Thus the plaintiffs were seeking funding for the proceeding from creditors of Garland, and sought to extend the timetable on the basis that the outcome of those funding enquiries would likely influence the outcome of the applications for security for costs. On 9 June 2020, the Liquidator had circulated the creditors seeking expressions of interest for the creditors to fund this proceeding. The response of the creditors to the funding of the proceeding would influence the plaintiffs’ evidence and submissions in response to the applications and time ought to be allowed to the plaintiffs to obtain that response.
(c) the need to consider the evidence from the costs consultants engaged by the sixth and seventh defendants, including whether it is desirable to engage an independent costs consultant to respond to that evidence; and
(d) Garland proposed to seek leave to cross examine the deponent of the affidavit in support of the seventh defendants’ application for security for costs, Mr Bill Velos.
By order made on 11 June 2020, the hearing was fixed for 30 June 2020, with directions for the filing of affidavits and submissions by Garland and reply submissions by the sixth and seventh defendants, they having filed submissions in support of their applications beforehand.
Affidavit evidence
The applications for security were supported by affidavits made, in the case of the sixth defendants, by Mr Roy James Stenning, and in the case of the seventh defendants, Mr Bill Velos.[11]
[11]Stenning affidavit and the Velos affidavit.
The Stenning affidavit provides, so far as relevant:
(a) By letter dated the 22 November 2019, the sixth defendants wrote to the plaintiffs’ solicitors pointing out that they were concerned about the risk of not recovering costs in the event that they obtain a costs order in their favour at trial and asked what resources were available to Garland to pay any costs orders in the proceeding.
(b) By letter dated 5 December 2019, the plaintiffs responded that the financial position of Garland was set out in the affidavit of Stephanie Kate Davies made 5 September 2019 (and that disclosed that apart from the Retained Funds the amount held by the liquidator was $8,897.47). The letter went on to note that the sixth defendants claimed to be first ranking secured creditors, including in respect of their legal costs, in respect of the Retained Funds. If that is correct, then the sixth the defendants are secured by the Retained Funds.
(c) He states his belief that if the claims in the proceeding against the sixth defendants fail and Garland is ordered to pay their costs, it will be unable to do so. Further, in the event that the sixth of defendants’ claim to a charge against the Retained Funds fails, but they otherwise succeed in their defences, then they will be unable to recover their costs from the plaintiffs.
(d) On 7 April 2020, Stenning retained Sergey Sizenko of Victorian Legal Costs Assessors, a costs consultant, and an Australian Legal Practitioner, to assess the sixth defendant’s costs incurred in the proceeding and to estimate the costs to be incurred up to the mediation. He exhibited a copy of the costs consultant’s report which estimated costs incurred from 15 August 2019 to 27 April 2020 in the sum of $122,944.50. The report estimated the costs to be incurred up to mediation in the sum of $78,271.05, making the total cost $201,215.55.
The Velos affidavit provides, so far as relevant:
(a) The seventh defendants were the registered first mortgagees of apartments 1.9 and 1.22 and commercial space at G.01, G.04 and G.03 in the Atrium. Apartment 1.19 was sold by a contract of sale dated 28 February 2019 for the sum of $415,000.00 (against a valuation of $410,000.00). Apartment 1.22 was sold by a contract of sale dated 17 July 2019 for the sum of $390.000 (against a valuation of $410,000.00). The property G.03 was sold for $1,100,000.00 plus GST (against a valuation of $700,000.00). They sold the properties pursuant to the mortgages and the surplus totaling $617,898.45, was paid into the Retained Funds.
(b) In his Report to Creditors of 24 May 2019, the Liquidator had revalued the apartments from a range of $300,000 to $330,000 to a range of $290,000 to $315,000 due to the company being placed into liquidation and the large number of apartments for sale in the Atrium.[12]
[12]It is noted that the Report, which is exhibit BV-1 to the Velos affidavit refers to these values in relation to 3 one bedroom apartments, two with car parks, that were unencumbered and thus did not specifically refer to the apartments mortgaged to the seventh defendants: Report to Creditors dated 24 May 2019, [7.1].
(c) The seventh defendants sold the mortgaged properties well above valuation. While the claim of Garland takes issue with agency fees, among other things, there is no particular aspect of the statement of claim that identifies why a cause of action arises by reason of the seventh defendants paying agents’ commission that was lower than that paid by Garland itself in various instances and which, in any event, resulted in sales above value.
(d) On 22 November 2019, Velos send a letter to Cornwalls (the plaintiffs’ solicitors) seeking information as to what resources were available for Garland to pay the defendants’ costs in the proceeding. Not having received a response, he sent a further letter on 5 December 2019 requesting a response to his letter of 22 November 2019.
(e) On 5 December 2019, Mr Velos received a response referring to the seventh defendants’ claims as secured creditors by reason of a charge claimed against the Retained Funds and stating that the plaintiffs were relying upon the Retained Funds to satisfy any costs order.[13] This response overlooks that fact that, if the seventh defendants’ claim to a charge over the Retained Funds to secure their costs fails, but they are otherwise successful in their defence of the plaintiffs’ claims, then the seventh defendants will have no security for any costs ordered in their favour.
(f) On 6 December 2019, he sent a further letter to Cornwalls advising that Zeninvest laid claim as secured creditor for an amount greatly in excess of the Retained Funds. In this letter, he referred to the affidavit of Stephanie Davies made on 5 September 2019, in which Ms Davies deposed that the total assets of Garland (excluding the Retained Funds) were about $8,897.40. Cornwalls responded on 19 February 2020 re-stating that the claims of Zeninvest and Zuccubarr are irrelevant if the seventh defendants are first ranking secured creditors. Mr Velos sent a further letter to Cornwalls on 24 February 2020 requesting further information in respect of the extent of the resources of the Company.
(g) Mr Velos had also retained Sergey Sizenko of Victorian Legal Costs Assessors. He exhibited a copy of his report as to the costs incurred since 16 August 2019, and the costs likely to be incurred by the seventh defendants up to and including mediation, in the sum of $132,985.09.
[13]The letter also stated that at that date the retained funds were $2,028,843.83.
In addition to the properties sold as referred to in the Velos affidavit, the liquidator’s Report to Creditors dated 24 May 2019, also referred to the sale of lot G.01, which sold for $2,200,000 plus GST with settlement effected on 12 April 2019.[14] The Report to Creditors also discloses that the sum paid by Mr Velos to the Liquidator of $617,898.45, referred to above, was the surplus funds from the sale of lot G.01.
[14]Report to Creditors, exhibit BV-1 to the Velos affidavit, [7.9.1].
The applications for security were opposed and the partner at Garland’s solicitor(Cornwalls), Radhika Kanhai, made an affidavit shortly before the hearing which exhibited a vast array of documents relevant to:
(a) the sales of the mortgaged properties;
(b) the assignment of lot 213 by Steer Inc (Steer) to Southage Pty Ltd (Southage) (as to which see below [48]-[68]);
(c) the correspondence leading up to the hearings before Matthews JR on 6 September 2019;
(d) the correspondence subsequent to the applications for security;
(e) the Liquidators Circular letters to creditors of Garland dated 9 June and 19 June 2020 seeking to raise from them funds so as to meet any order as to security for the Mortgagee defendants’ costs; and
(f) the engagement of and report by a costs consultant, Anna Sango of Kirk Barclay Pty Ltd, giving an independent costs assessment of the amounts sought by the Mortgagee defendants by way of security for their costs. That report expressed the opinion that the sixth defendants past costs were properly assessed at $41,951.81 (exclusive of GST) and future costs to the time of mediation were assessed at $25,565.10, a total of $67,516.91; and that the seventh defendants past costs were properly assessed at $19,105.58 (exclusive of GST) and future costs to the time of mediation were assessed at $25,885, a total of $44,990.58.
There is no mention in the affidavit whether any creditors were prepared to provide funds to meet any order for security, and the clear implication from the lack of any response exhibited to Ms Kanhai’s affidavit is that no one did so. There is evidence in the Liquidators circular letters that he has funded the litigation personally and that his costs as at the date of the 9 June 2020 circular letter to creditors were $188,182.63.[15]
[15]Exhibit RAK-1 to the Affidavit of Radhika Kanhai made 20 June 2020, page 338.
The claims and defences
Company’s claims
Garland’s claims relate to whether amounts deducted or disbursed by the Mortgagee defendants from the proceeds generated upon their sale of mortgaged lots within the Atrium were “reasonable selling costs”. In particular, Garland alleges that the Mortgagee defendants breached duties owed to Garland:
(a) to act in good faith and to exercise care (having regard to the interests of Garland) when exercising a power of sale; and
(b) to account to Garland for the sale proceeds.
The statement of claim pleads each mortgagee’s sale individually, setting out the commissions and costs deducted from the sale proceeds and the failure of the Mortgagee defendants to provide to Garland the contracts pursuant to which the agents were engaged. Each of seventh defendants, and in some cases the sixth defendant, had retained Payton Property as a head selling agent on terms that it would be entitled to commission of 8% plus GST on sale prices. This rate is alleged to be unreasonable and materially in excess of the rate charged by licensed estate agents for selling equivalent properties. Garland, via the Liquidator, sold lots in the Atrium at the same time as the Mortgagee defendants at the commission rate of 2% of the sale price, plus GST.[16] In light of those arrangements, Garland’s contention is that the commission payable to Payton Property materially exceeds the market rate of commission at the relevant time.
[16]Exclusive Sale Authorities between Garland and Jessamy Lomax of Philip Webb dated 15 November 2018: pages 190-227 of exhibit RAK-1 to the Affidavit of Radhika Kanhai made 20 June 2020.
Garland claims in the prayer for relief against the Mortgagee defendants an order for an account of the amounts that they ought to have remitted to the Liquidator pursuant to the October 2018 Order, alternatively damages, interest and costs.
For the purpose of providing creditors with information regarding Garland’s claims, the Liquidator has calculated that if the Mortgagee defendants had paid commission of 4.4% and incurred advertising costs of $4,400 in respect of each property (which reflects a commission rate that is double the amount charged by the estate agents retained by Garland during the same period), additional funds totaling $340,314 would have been received by Garland from the sale proceeds. Garland also seeks to recover ‘rebates’ of $25,000 applied in respect of some sales and fees paid as legal costs and to Payton Securities.
The Liquidator’s estimate of the quantum of the amounts improperly deducted and disbursed from the sale proceeds (which does not include amounts that may be recoverable in respect of excessive legal fees or fees apparently paid to a mortgage manager) exceeds $600,000 (before costs and interest).[17]
[17]Affidavit of Radhika Kanhai made 20 June 2020, exhibit RAK-2.
As I have pointed out above ([19]), Garland appears to acknowledge the validity of the claim made by Zuccubarr and has paid either the whole or a very substantial part of that claim.
The claims now pleaded against the remaining active defendant, Zeninvest, should also be identified. Zeninvest claims against the Retained Fund on three bases. The first two are based on Exclusive Agency Agreements, the first entered into in 2016 and the second in 2017. In relation to each Agency Agreement, Garland claims that the charging clause did not confer any security over the Atrium. In relation to the 2016 Agency Agreement, Zeninvest admits that it does not create any security interest in respect of Atrium. In relation to the 2017 Agency Agreement, Zeninvest seeks to rectify the agreement based upon an antecedent common intention that the agreement would create a security interest in unsold properties in the Atrium.
The third basis is a Deed of Acknowledgement entered into between Garland, Zeninvest and Altus Developments Pty Ltd (Altus). Under the Deed of Acknowledgement, Garland, in effect, indemnified Zeninvest against any loss suffered by it by reason of default by Altus in paying commissions under an Agency Agreement dated 30 August 2013 entered into between Altus and Zeninvest and guaranteed by the two directors of Altus, who were also directors of Garland.
Garland claims that the Deed of Acknowledgement was an uncommercial transaction within the meaning of s 588FB of the Corporations Act 2001 (Cth) (Corporations Act), an unreasonable director related transaction pursuant to s 588FDA of the Corporations Act, an insolvent transaction within the meaning of section 588FC of the Corporations Act and that it is voidable under section 588FE(3) or 588FE(6A) and the Court may make orders under s 588FF of the Corporations Act. The defences to these claims raise a complex of facts and matters, so that setting about here does not advance any assessment of the prospects of success of Zeninvest successfully claiming against the Retained Funds.
Mortgagee defendant’s defences and counterclaims
The defences of the Mortgage defendants are in similar form, although the sixth and seventh defendants are separately represented. First, a number of general statements are made about the difficulties faced by the mortgagees in selling the lots in the Atrium, as follows:
(a) the value and sale-ability of lots having an area of less than 50m2 were adversely affected by lenders perceiving such lots as a risk;
(b) the value and sale-ability of all the lots were adversely affected by:
(i) the proximity of the Atrium to Springvale Road, Nunawading, and thus subject to traffic noise, and its proximity to non-residential buildings;
(ii) the depressed market for residential dwellings; and
(iii) building defects affecting common areas.
(c) that Garland had engaged agents, in particular Zeninvest, and others, to sell lots at much higher commissions and these attempts at sales were unsuccessful. Many of the lots had been on the market for some time. There were attempts by the Mortgagee defendants to sell through Savills in late 2018 without success;
(d) the Mortgagee defendants adopted a channel sales strategy pursuant to which Payton Property contracted with subagents who were remunerated from the total commission payable to Payton Property. This strategy involved selling the apartments without visibly putting all of them to the market at the same time; and
(e) overall, the defence is that the commissions were reasonable in the circumstances, the rebates were necessary to achieve a sales, the legal costs included the costs of enforcement and, in a couple of instances, anticipated costs as a result of this proceeding, which in the events that have happened were underestimated.
In Garland’s Replies and Defences to the Counterclaims of the Mortgagee defendants, issues are raised with respect to compliance by Payton Property with various provisions of the Estate Agents Act 1980 (Vic) (Estate Agents Act), in particular s 49A (failing to set out the percentage commission expressed as both a percentage and as the dollar amount), s 50 (prohibiting an estate agent from recovering or retaining commission without compliance with various requirements) and s 48 (requirements for commission sharing).
Payton Property contracted with sub-agents, who were remunerated from the total commission paid to Payton Property. Two of these sub-agents (Buy Assist Australia and Empire (Vic) Pty Ltd) were not licensed estate agents or were not the subject of a commission sharing notice that satisfied the requirements of s 48 of the Estate Agents Act. It followed that no payment of commission to those sub-agents was possible.[18]
[18]Melbourne Coach Terminal Pty Ltd v Wyss [2003] VSC 122, [45] (Hansen J).
The Mortgagee defendants also claim that they are secured creditors in respect of their legal costs incurred in this proceeding. They claim that under the mortgages the legal fees incurred, and the legal fees yet to be incurred, comprise ‘monies hereby secured’ within the meaning of each mortgage. They claim that the Retained Funds are charged with payment of these costs and counterclaim that this charge has priority over and ranks ahead of all other interests, including the Liquidators expenses properly incurred in preserving, realising and getting in the Retained Funds and the indebtedness of Garland to Zuccubarr. Garland puts these matters in issue and raises some additional matters by way of reply and defence.
The sixth defendants also make a claim of misleading or deceptive conduct in trade or commerce, and raise an estoppel, against Garland based upon a ‘commission’ representation by silence. The alleged commission representation arises from the sixth defendants reporting to Garland some sales at the allegedly unreasonable commission rate of 8% plus GST, requesting from Garland whether it had any concerns with respect to those sales, getting no response, and proceeding to make other sales on the same terms.
The seventh defendants repeat the commission representation by silence, but based upon the reporting by the sixth defendants and the failure of Garland to respond to the sixth defendants that they had any difficulty with the commission rate incurred.
In each case, it is alleged that the representation was a contravention of s 18 of the Australian Consumer Law (schedule 2 to the Competition and Consumer Act 2010 (Cth)). It is alleged by each of the sixth and seventh defendants that if the orders sought by Garland in this proceeding are made then they will suffer loss and damage, which is then claimed.
Garland denies the allegations based upon the misleading or deceptive conduct and raises some factual matters in the replies and defences to counterclaim.
Velos cross-examination
The sale of lot 213 was said by Garland to give rise to further claims, and also gave rise to an application to cross-examine Mr Velos. At the time of the making of the October 2018 Orders, Steer, one of the sixth defendants, was registered as mortgagee of Lot 213. It was a 1-bedroom apartment of 47 square metres with a car space. The sixth defendants’ GSA provided its price range as $284,050-$313,950.[19] According to one of the seventh defendants, Southage, the sale of lot 213 was effected pursuant to a contract executed by Steer and the purchaser on or about 29 May 2019, which contract is alleged to have been completed on 9 July 2019.[20] Southage further alleges that on or about 4 July 2019, Southage and Steer executed an assignment of the mortgage and loan agreements relating to Lot 213 between Steer and Garland.[21]
[19]Affidavit of Radhika Kanhai made 20 June 2020, exhibit RAK-1, Page 11.
[20]Seventh defendants’ Defence, [151A(a)].
[21]Seventh defendants’ Defence, [151A(b)].
The assignment of the loan agreement and mortgage securing the loan was effected by an undated ‘Assignment of Loan Agreement’ (Assignment).[22] By that Assignment, in exchange for the settlement sum of $38,033.29 (Settlement Sum), Steer ‘as legal and beneficial owner of an interest in the Loan and all other moneys due and payable’ by Garland to Steer, assigned to Southage ‘all of the right title and interest’ of Steer in the loan agreement and mortgage, together with ‘all amounts which are payable or may become payable’ by Garland to Steer pursuant to the loan agreement and mortgage.[23] The term ‘Loan’ was defined to mean the sum of $530,000 as varied from time to time pursuant to the loan agreement. The mortgage was identified, obliquely, as the mortgage over lot 213 in the Atrium.[24]
[22]Affidavit of Radhika Kanhai made 20 June 2020, exhibit RAK-1 Pages 76-78.
[23]I ignore for present purposes that the assignment also included the rights of Steer under a Guarantee.
[24]The definition of the mortgage misstated its date but at the foot of the Assignment the certificate of title for lot 213 was noted as well as the registration number of the mortgage.
The Statement of Moneys relating to this sale prepared by Velos Lawyers, shows the sale price was $290,000 and included the following deductions:[25]
[25]Affidavit of Radhika Kanhai made 20 June 2020, exhibit RAK-1 Page 74. There are other deductions that are not the subject of complaint by Garland, including GST withholding tax, rates, land tax and the like.
(a) $25,960 to Payton Property (which exceeds 8.8%);
(b) $5,013.63 to Payton Securities for management fees;
(c) $1,774.59 to the State Revenue Office (SRO) (land tax);
(d) $33.031.75 to Steer;
(e) $15,500 to Harding Stenning & Co, Lawyers, ‘to be held in their trust account pending future legal action’.
(f) $143,454.09 to Velos Lawyers trust account.
The Statement of Adjustments at settlement also showed a rebate to the purchaser of $25,000. A trust account statement prepared by Velos Lawyers records $127,604.01 of the $143,454.09 having been transferred on 8 August 2019 to Southage (with the narration ‘Loan payout’).[26] This payment is defined in the Statement of Claim as the ‘Purported Loan Payout’. Garland pleaded that the entitlement of Southage to the Purported Loan Payout ‘is not apparent’.[27] The defence filed on behalf of Southage provide no justification or explanation for its receipt of the Purported Loan Payout. In fact the defence pleads that the allegation is vague and embarrassing, in that it does not contain a material allegation of fact or law relevant to any claim made against it.
[26]Affidavit of Radhika Kanhai made 20 June 2020, exhibit RAK-1 Page 95.
[27]Statement of Claim, [158 (b)].
Garland maintained that the only sum secured by the Steer mortgage was the sum of the $38,000 odd and that the Purported Loan Payout should have been paid under the October 2018 Order to the solicitor for the liquidator.
In those circumstances, and where one of the directors of Southage (Mr Velos) made an affidavit in support of the application for security for costs on behalf Southage, Garland sought to cross- examine Mr Velos for the purpose of establishing an evidentiary foundation for the proposition that the conduct of Southage in connection with the Purported Loan Payout may have contributed to Garland’s current financial position.
Mr Velos was a director, secretary and shareholder of Southage.[28] Although the Velos affidavit refers to the sales of other lots in the Atrium, it does not deal with the unusual features of the sale of lot 213. Because the cross-examination might elucidate an issue of fact relevant to the interlocutory application,[29] namely the issue of whether the Purported Loan Payout should in truth have been paid to the Liquidator’s solicitor under the October 2018 Order, I considered that cross-examination of Mr Velos should be allowed. This was particularly the case where the pleadings did not produce a clear issue as a result of the seventh defendants defence failing to address the allegations regarding the Purported Loan Payout. If the Purported Loan Payout should have been paid to the Liquidator’s solicitor the failure to do so may have contributed to Garland’s current financial position.
[28]See company search at pages 110-114 of exhibit RAK-1 to the Affidavit of Radhika Kanhai made 20 June 2020.
[29]Matthews v SPI Electricity Pty Ltd & Ors (No 6) [2013] VSC 422 [28(b)].
In the course of the argument concerning whether leave should be granted to cross-examine Mr Velos, Counsel for the seventh defendants referred to a Notice to Produce that had been filed and served the day before the hearing. That Notice required Garland to produce a spread-sheet prepared by Angela Kennedy of the Liquidator’s office in respect of land tax payable on sales of lots in the Atrium and documents that evidence the entries in that spread-sheet. It was not produced, but it was explained by Counsel for the seventh defendants that the issue of what the Purported Loan Payout was used for was for the payment of outstanding Land Tax on a number of lots in Atrium.
Mr Velos’s evidence
The substance of the evidence given by Mr Velos was to the effect set out in the following paragraphs.
The contract of sale of lot 213 was entered into by Steer. Before settlement of the sale, Southage entered into the Assignment with Steer. The consideration for the Assignment was $38,033.29. Mr Velos did not know how much was payable under the mortgage to Steer. He knew that the Settlement Sum of $38,033.29 was payable for the assignment but he did not know what was payable to Steer by Garland.
In return for the Settlement Sum, Mr Velos understood that Southage was getting a mortgage that secured $530,000, and that it was an ‘all monies mortgage’. In this regard, the following exchange occurred in the course of the cross-examination:
Well, sir, that’s – the mortgage didn’t secure $530,000, though, did it, sir? The mortgage only secured that part of the $530,000 that had not already been repaid to Steer?‑‑‑As far as I’m concerned I read here it was $530,000 that it secured. I didn’t see any other documents other than that. It was $530,000 that it secured and the settlement sum for that assignment was $38,033.29. [30]
So your evidence before His Honour, your sworn evidence is that you understood for $38,000 Steer was giving Southage the right to collect $530,000 for ‑ ‑ ‑?‑‑‑Was assigning it.
‑ ‑ ‑ going with it?‑‑‑That’s correct, yes.
How does that make any commercial sense, sir? Why would Steer do that?‑‑‑Don’t ask me; ask Steer. [31]
[30]Gregory Stuart Andrews (in his capacity as Liquidator of Garland Projects Pty Ltd (ACN 156 037 848) & ANOR v Zuccubarr & Ors, S ECI 2018 01420 Transcript 30 June 2020 (Transcript), 42.11-18.
[31]Transcript, 42.20-25.
The Settlement Sum under the Assignment was paid to Steer out of the sale proceeds at settlement of the sale. The amount recorded in the Statement of Moneys relating to this sale prepared by Velos Lawyers (see above at [50(d)]) of $33,031.75 as paid to Steer was the balance of the settlement sum under the Assignment, the difference ‘may be some legal costs that Steer instructed’ Mr Velos to pay to their lawyers at settlement,[32] or possibly management fees payable to Payton Securities.[33] Mr Velos could not recall exactly.
[32]Transcript, 44.30 - 45.6.
[33]Transcript, 45.7 – 10.
The amount of $15,500 that was paid to Harding Stenning to be held in their trust account pending future legal action (see above at [50(e)]) was paid for any future legal work they needed to do at their request:
…it was a huge matter that both our legal firms were involved in and there was tidying up, there was a lot of tidying up to do and I felt that 15 and a half thousand dollars, their request for 15 and a half thousand dollars wasn’t inordinate under the circumstances. That’s all.[34]
[34]Transcript, 47.8 – 13.
In relation to the critical amount of $143,454.09 paid to Velos Lawyers trust account, a small part of that ($2,598.75) was Velos Lawyers legal fees, but the amount recorded as ‘loan payout’ to Southage of $127,604.01 was for land tax, not payable in respect of lot 213, but a consequence of a grouped liability of Garland with Antaeus Development Pty Ltd (Antaeus):
And how did you calculate that sum, sir, of $127,604.01?‑‑‑The payment by Southage of substantial land tax liability that the, that Garland in liquidation owed the State Revenue Office and which Southage and Eben paid, paid in reduction of the land tax liability. No settlements were going through, Your Honour, unless that land tax was pre-paid and as a result of the fact that my settlements were coming up first and the largest settlements, that’s where it came from. It reduced the security, the security of the mortgagees and in consequence of that, there was a shortfall which was applied towards the loan pay out.[35]
HIS HONOUR: Can you tell me, Mr Velos, is there something that’s been discovered in the discovery of Southage and Eben that verifies, first, the amount of the liability to the SRO in respect of land tax that was paid by this sum of money and, secondly, the properties in respect of which that land tax was incurred?‑‑‑Yes. There’s settlement statements for each of those properties that have been provided, Your Honour. I had to sign undertakings to the State Revenue Office under oath that I would remit the sums of $50,000 on three of those settlements, $50,000 each for each of those settlements, and I took that on as a personal undertaking in order to see those settlements through and achieve a substantial reduction in the land tax which did not attach to the particular units which I was selling. In other words, I was reducing the total liability of the company.
To the detriment of the mortgagees?‑‑‑To the detriment of the mortgagees.
And did that cover properties in respect of your mortgagees – sorry, properties over which your mortgagees did not hold mortgages?‑‑‑That is correct.
So it was, in effect, for the benefit of other mortgagees not represented by your firm?‑‑‑That is correct, Your Honour, and Angela Kennedy and the liquidator have personal knowledge of this. I’ve spoken to Angela Kennedy, who is the right hand of the liquidator, on several occasions about this issue and they have done nothing about it. I was under – I was under significant pressure, contractual pressure to see these contracts were honoured, because they were substantial contracts in millions of dollars and I acted in the best interests of the mortgagor. I got above, above valuation prices for the – for at least one of the properties, $400,000 above valuation and all my properties ‑ ‑ ‑
That was ground floor commercial property, wasn’t it?‑‑‑The ground floor three, it was three – 700,000 valuation, I got 1.1 million for it, substantial, and I contributed because of my efforts, my efforts I contributed almost half of all the money in the trust fund, Your Honour. In fact, it was as a result of my efforts that I consolidated two titles and then subdivided GO3 and GO1 that caused or enabled the sales at a substantial profit or substantial amount and now I’m being persecuted by this liquidator. I’m sorry to say that. I’m so angry about it, as a practitioner, and I’ve been looking – I’ve been made to look like an idiot, but I’m not. I’m wearing my arm on my sleeve, Your Honour, I’m sorry.[36]
[35]Transcript, 48.8 – 19.
[36]Transcript, 48.20 – 50.4.
Thus, the payment covered properties over which the seventh defendants did not hold mortgages and Mr Velos gave a personal undertaking in order to see settlements through and achieve a substantial reduction in the land tax owing by Garland but which did not attach to the particular units which he was selling. In other words, he was reducing the total liability of Garland.[37] Mr Velos expressed considerable frustration about the attitude of the Liquidator:
I’ve tried my damndest with this particular case and I’ve had no help from the liquidator and they have a spreadsheet of all, all the land tax that was owing. I have emails by Angela Kennedy directed to the Land Tax Office and the State Revenue Office saying that the overpayments that I made, that the liquidator receive security and that that money be paid back once another property in Maidstone, Maidstone, once that sold, that that money that I paid for the land tax ought to be refunded to the company in liquidation.[38]
[37]Transcript, 48.31 – 49. 4.
[38]Transcript, 50.6 – 16.
The reference to the Maidstone property is a reference to a property at 204-210 Ballarat Road, Maidstone, Victoria, registered to Antaeus. Mr Velos produced a bundle of emails and file notes[39] proximate to and on the day of settlement of the sale of lot 213 which included an email dated 8 July 2019 from Angela Kennedy of the Liquidator’s office communicating with the SRO which had claimed an amount owing by Garland of $336,802.64 which was required to be paid from the proceeds of settlement of apartment 213 in the Atrium. The email shows that this is a result of the grouping of Garland with Antaeus. The email suggests only $14,856.74 owing by Garland overall in respect of the 2018 assessment year. In the email, Ms Kennedy requested as a matter of urgency that the SRO provide a range of information, including –
[39]Admitted into evidence as Exhibit 1 at the hearing.
(a) how the sum of $336,802.64 is made up, noting that the majority of the Garland’s properties have been sold and as settlement has been effected, amounts have been paid to the SRO in reduction of its debts;
(b) a full accounting of funds paid to date to the SRO by the company and Antaeus;
(c) whether it is your intention to remove your caveats supporting your statutory charges over Antaeus’s property once your land tax liability has been extinguished; and
(d) can the liquidator substitute for the SRO against Antaeus once the total land tax liability has been satisfied by Garland?
The email of 8 July 2019 from Angela Kennedy to the SRO concludes with the statement that –
The liquidator remains concerned that it appears that the company creditors are being prejudiced by paying land tax on behalf of Antaeus development while you are fully secured against its property situated at Maidstone. In the event that you remove your caveats against Antaeus Pty Ltd’s property, I would be grateful if you would provide the liquidator with 14 days’ notice”.
The documents included in the bundle in Exhibit 1 do not include any response from the SRO. They do show, however, one undertaking to the SRO signed by Mr Velos for the sum of $1,774.59 owed in respect of lot 213. There are also unsigned undertakings for the whole of the outstanding land tax.
Nevertheless, Mr Velos maintained as the evidence quoted above shows, that he had given an undertaking or undertakings in respect of a greater sum that that owing in respect of lot 213. What is unclear, however, is precisely what that amount was and whether the Liquidator has recovered any of the overpayment from Antaeus. In his affidavit made on 4 October 2019, Mr Velos exhibited his reports to the Liquidator in which he stated that he had been required to pay $50,000 to the SRO per unit to settle the sales of lots G.01 and G.03, and $50,000 at the settlement of lot 119, and the total remitted to the SRO was $154,533.58.[40] The exhibits to the Kanhai affidavit of 20 June 2020 include the statements of moneys for lot G03 which shows $50,000 deducted from the sale proceeds for payment to the SRO for land tax (p.46), for lot 119, which shows $50,000 deducted from the sale proceeds for payment to the SRO for land tax (p 49), but in relation to lot 213 only $1,774.59 as being paid to the SRO for land tax (p. 74). How the proceeds from the sale of lot 213 became available to pay land tax for the other lots is unclear.
[40]Exhibit BV-7 to the affidavit of Bill Velos made 4 October 2019.
The cross-examination revealed that the mechanism employed by Mr Velos to enable the payment of the land tax he had undertaken to pay was to use the total liability of the mortgagor under the assigned mortgage over lot 213, $530,000, that had been purchased for $38,033.29 to enable the payment of the land tax:
MR McALOON: …Prior to the assignment document that we looked at earlier where Southage took an assignment of certain rights from Steer, you accept that without that assignment, Southage had no entitlement to receive any part of the proceeds from lot 213. You agree with that?‑‑‑Oh, the – the – the assignment gave it the ability and the entitlement by law. Yeah. That’s correct. Yes.
And it must follow then that Southage could only recover from the proceeds of lot 213 amounts that were recoverable by Steer from the proceeds of lot 213?‑‑‑No. It’s an all moneys mortgage, and, um, as – as the new mortgagee that stepped in – as the new mortgagee that stepped in – that’s Southage – if, um, the company owed money to Southage, it could be, ah, taken as a legitimate deduction.
So, sir, your evidence is that you understood that by taking an assignment of Steer’s rights in respect of lot 213 under its mortgage over lot 213, Southage somehow attained rights beyond the rights that Steer had?‑‑‑There’s $530,000 that’s secured, ah, by that, ah – by that mortgage. And, ah – and Southage – and Southage is able to rely upon that, and that’s what was assigned.[41]
[41]Transcript 54.17 – 55.9.
Counsel for Garland attempted to press Mr Velos on that point further, but I ruled that was an ultimate question and not one to be determined on the security for costs application.
Applicable law
I have set out in many decisions the legal principles and factors relevant to applications for security for costs made under r 62.02 of the Supreme Court (General Civil Procedure) Rules 2005 and under s 1335 of the Corporations Act 2001 (Cth).[42]
[42]see for example Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311, at [14]-[22]; US Realty Investments LLC (No.1) v Need [2013] VSC 590, at [18]-[38]; ACN006577162 Pty Ltd v Beauville Pty Ltd [2014] VSC 298; ACN 096 450 770 (formerly AJH Lawyers Pty Ltd) v Mathieson Nominees & Anor [2017] VSC 559, [36] [60];
The applicable principles are not in dispute. So far as relevant to the present applications, they are:
(a) The first question is a jurisdictional condition that must be satisfied - whether there is reason to believe that Garland will be unable to pay the costs of the Mortgagee defendants if they are successful.[43]
[43]Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377, [11] (‘Livingspring’).
(b) The burden rests on the Mortgagee defendants from ‘first to last’ to persuade the Court that an order for security should be made.[44]
[44]Livingspring (2008) 20 VR 377 [21].
(c) In determining whether an order for security should be made requires the making of a risk assessment: is there a risk that the corporation will be unable to pay? A risk assessment is, of necessity, imprecise. What is called for is a practical, commonsense approach to the examination of the corporation’s financial affairs.[45]
[45]Livingspring, [15]-[16]; Harmonious Blend Building Corporation Pty Ltd v Keene [2014] VSC 649 [38]; ACN 096 450 770 (formerly AJH Lawyers Pty Ltd) v Mathieson Nominees & Anor [2017] VSC 559, [40].
(d) As a general rule, where a claim discloses a cause of action, in the absence of evidence to the contrary, the Court should proceed on the basis that the claim is bona fide with reasonable prospects of success.[46]
[46]Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497; Harmonious Blend Building Corporation Pty Ltd v Keene [2014] VSC 649 [52]; Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311, at [20(a)]; ACN 096 450 770 (formerly AJH Lawyers Pty Ltd) v Mathieson Nominees & Anor [2017] VSC 559, [58].
(e) Whether Garland’s lack of funds has been caused or contributed to by the conduct of the Mortgagee defendants in relation to the transactions the subject of the claim.[47] I repeat the brief summary of the law in this area I made in Coonwarra Pty Ltd v Cornonero Pty Ltd (No 2):[48]
[47]Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] QB 609; Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311, [20(b)]; Coonwarra Pty Ltd v Cornonero Pty Ltd (No 2) [2019] VSC 702, [52].
[48][2019] VSC 702, [52].
(iv) The burden of proving this ground lies with the plaintiff.[49]
[49]BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339, 345-6 (Anderson J, Ipp and Kennedy JJ agreeing); Ninan v St George Bank Ltd [2012] FCA 905, [37], [48].
(v) The fact that the plaintiff’s impecuniosity was caused by the defendant must have a strong evidentiary foundation.[50]
[50]Right Home Improvements International Pty Ltd v Imperial Alarm Screens (Aust) Pty Ltd [1986] ATPR 40-641. See also Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664, [86]-[88], [100]; Coonwarra Pty Ltd v Cornonero Pty Ltd (No 2) [2019] VSC 702.
(vi) The conduct of the defendant needs to relate directly to the claim before the court.[51]
[51]KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189, 197 (Beazley J); Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] QB 609, 626 (Lord Denning MR).
(vii) It is a very difficult ground to prove, and is related to the ground of reasonable prospects of success.[52]
[52]Australian Quarry Holdings Pty Ltd (In liq) v Dougherty (1992) 8 ACSR 569, 570 (Ormiston J).
(viii) It requires a basic determination of whether the defendant may have caused loss to the plaintiff, which can stray into the territory of a voir dire.[53]
[53]Dal Pont, Law of Costs (LexisNexis Butterworths, 4th ed, 2018), [29.100]-[29.101] 1077; citing J H Hames ‘Security for Costs: Extent of Discretion’ (1976) 120 Sol J 479, 480.
(ix) At most, what it can show is that the defendant’s actions may have caused the impecuniosity of the plaintiff.[54]
[54]Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 1,1 [34] (Hodgson JA).
(f) Whether the making of an order for security would unduly stultify the ability of the plaintiff to pursue an arguable case legitimately instituted.[55]
[55]MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 (SASC); Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507; Excelsior Run Pty Ltd (in liq) v Nelius Pty Ltd [2001] VSC 161; Livingspring (2008) 20 VR 377, 383; Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311, at [20(d)];
(g) The extent to which it is reasonable to expect shareholders or creditors (or beneficiaries, if the company is a trustee) to make funds available to satisfy any order for security which is made.[56]
(h) Neither the Rules (r 62) or the Corporations Act (s 1335) compel the Court to order security against an impecunious corporate plaintiff. The court is given an unfettered discretion to do what is justly required by the circumstances of each case.[57] If the court takes the view that this protection should not be afforded to the defendant, it has an unlimited and unrestricted discretion to give effect to such view without having to look for special circumstances.[58]
(i) Delay in applying for security may be ground for refusing to order security. The Company is entitled to know its position in relation to security at the outset, and before it embarks to any real extent on its litigation, and certainly before it makes a substantial financial commitment toward litigating the claim.[59]
[56]National Bank of New Zealand Ltd v Donald Export Trading Ltd [1980] 1 NZLR 97; Pacific Acceptance Corp Ltd (t/as Flack & Flack) v Forsyth (No 2) [1967] 2 NSWR 402 at 407; Drumdurno Pty Ltd v Braham(1982) 42 ALR 563 at 570; Newtons Travel Services Pty Ltd v Ansett Transport Industries (Operations) Pty Ltd (1982) 44 ALR 163 at 166 (FCA); Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311, at [20(e)].
[57]Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd, [1999] 2 VR 191, [15] (Winneke P and Phillips JA).
[58]Buckley v Bennell Design and Constructions Pty Ltd, (1974) 1 ACLR 301, 305 (Street CJ); cited with approval in Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191, 195 [14]-[15].
[59]Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301 at 309 (NSWCA); Smail v Burton; Re Insurance Assocs Pty Ltd (in liq) [1975] VR 776; Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311, at [20(f)].
Submissions and Consideration
There were discrete issues raised by the application, and the response by Garland, and I will deal with the application and response by reference to those issues. The first issue was whether the threshold jurisdictional condition was satisfied - whether there is reason to believe that Garland will be unable to pay the costs of the Mortgagee defendants if they are successful. Second, Garland’s prospects of success in the claims it makes against the Mortgagee defendants. Third, whether the Mortgagee defendants have caused or contributed to financial position of Garland. Fourth, whether the order for security will or may stultify the claim by Garland against the Mortgagee defendants. Fifth, whether delay by the Mortgagee defendants in making their applications should deny them security. Sixth, if security is to be ordered, what is the appropriate quantum of the security.
Impecuniosity
Submissions
The Mortgagee defendants contend that the threshold condition for the exercise of power is satisfied – there is reason to believe that the Company will be unable to pay the costs of the Applicants if they are successful because Garland is in liquidation and its assets are essentially the Retained Funds of about $1.4 million. Those Funds are subject to a claim by the Liquidator in respect of his remuneration, and the costs of the winding up, a secured claim by Zeninvest for a sum of $12,049,107,[60] and a secured claim by Zuccubarr for costs in respect of the proceeding.[61]
[60]Reply Submissions of the Sixth and Seventh Defendants filed 29 June 2020, [1(b)], referring to a written submission from Zeninvest (by letter addressed to Judicial Registrar Matthews) dated 2 April 2020, which was not in evidence. However the affidavit of Valentino Spyriadis made 26 September 2019 advances claims in that order, some of which are seriously questioned as a result of the failure of the Agency Agreements to give rise to valid charges on the Atrium.
[61]See above at [18]. I note that the Liquidators Circular to Creditors dated 9 June 2020 estimates the costs liability to Zuccubarr to be in the order of $35,000: exhibit RAK-1 to the affidavit of Radhika Kanhai made 20 June 2020, page 335.
By their letters dated 22 November 2019, the Mortgagee defendants enquired as to Garland’s ability to meet an adverse costs order. Garland’s response was that the Mortgagee defendants are, according to their counterclaims, first ranking secured creditors. If, however, Garland fails on its claims that the Mortgagee defendants have acted in breach of their obligations in paying unreasonable commissions, giving rebates and paying certain costs of the sale of the properties, and they are unsuccessful in their claim to be first ranking secured creditors of Garland, then they have no security at all.
Garland responded that although the Company is in liquidation, it has a significant asset in the Retained Funds. The Mortgagee defendants’ costs risk that is said to enliven the Court’s jurisdiction would only arise if the Mortgagee defendants’ counterclaim fails. If, under their mortgages, they are entitled to all the legal costs and expenses ‘incurred or paid by the mortgagee in connection with the mortgage’, as they contend, they will have no costs risk, given the quantum of the Retained Funds, relative to the quantum of the costs claimed by them.
In effect, the Mortgagee defendants are seeking security to address a potential outcome that will only arise upon their counterclaims being wholly unsuccessful. In that event, the Mortgagee defendants would be expected to be ordered to pay Garland’s costs of those counterclaims. The consequence will be that any costs liability of Garland to the Mortgagee defendants will be offset by the Mortgagee defendants’ own costs liability to Garland. That consideration, coupled with the quantum of the Retained Funds (which, on account of the operation of the October 2018 Orders, will still be available at the conclusion of the proceeding), means that there is insufficient reason to believe that Garland will be unable to pay the Mortgagee defendants’ costs in the event that Garland’s claims against them are unsuccessful.
For these reasons, the risk assessment in this case points to a low risk that Garland will not be able to pay the Mortgagee defendants costs. The summary of the law in ACN 096 450 770 (formerly AJH Lawyers Pty Ltd) v Mathieson Nominees & Anor[62] applies here. In that decision I said:
It has been held that in determining whether an order for security should be made under the Corporations Act 2001 or under s 62.02(1)(b) of the Rules (where a ‘reason to believe’ the corporation will be unable to pay the other parties costs is the threshold test), requires the making of a risk assessment: is there a risk that the corporation will be unable to pay? A risk assessment is, of necessity, imprecise. What is called for is a practical, commonsense approach to the examination of the corporation’s financial affairs. It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation’s impecuniosity. The provision equips the Court with the means to require that the defendant be secured against that risk.[63]
[62][2017] VSC 559.
[63]Ibid, [40], citing Livingspring, [15]-[16]; Harmonious Blend Building Corporation Pty Ltd v Keene [2014] VSC 649 [38].
Consideration
Whether the Retained Funds will be sufficient to cover all of the claims and costs depends in this case on Garland’s prospects of success against Zeninvest, as well as against the Mortgagee defendants and, importantly, the priority as between the secured interests of the Mortgagee defendants and Zeninvest. For reasons that I explain in relation to the second issue, Garland’s prospects of success, it is in this case impossible to come to any firm conclusion one way or the other.
Counsel for Garland urged upon me that the costs risk in relation to the mortgagee defendants only arises if a number of contingencies are satisfied, including that the claim by Zeninvest succeeds. There is great difficulty in making any realistic assessment of Zeninvest’s claims to a security interest in the Retained Funds. It is impossible to ignore the risk that Zeninvest may establish an interest in the Funds to some extent. Valuing that interest is difficult, but if Garland’s claims that the Deed of Acknowledgement is a voidable transaction should fail, then it is possible that the interest of Zeninvest in the Retained Funds could amount to over $10 million.
That, however, is not the end of the matter. The Retained Funds were established by order of the Court so as to preserve and protect the interests of those having a claim to an equitable interest in the Atrium land. It was the object of the Order to enable those equitable interests to follow the net proceeds of the sale of the Atrium lots. It was not feasible to determine then and there whether those who claimed equitable interests in the Atrium did in fact have the interests they claimed or what was the priority between them. However, the Retained Funds were, at the time of the October 2018 Order and remain now, subject to the registered, that is legal, interest of the Mortgagee defendants. It is a truism in this area of property law that the legal interests of the mortgagees in the lots in the Atrium have priority over the equitable interests, subject only to the fraud exception and actions in personam. That is why the Mortgagee defendants legal interests prevailed at the time of the Order and they prevail now over any interest that Zeninvest may have in the Retained Funds.
This means that if Garland fails and the Mortgagee defendants’ counterclaim that their costs in this proceeding are costs secured by their mortgages, then there is no costs risk facing them as their costs will be secured by their mortgages and take in priority over any successful claim by Zeninvest. There is, in my preliminary view, a very good prospect that the costs incurred by the Mortgagee defendants will satisfy the essential or core question, that they are a cost or expense incurred or paid by the mortgagees in connection with each mortgage and for which the mortgagor is liable under the mortgage.[64] It is very common in the property jurisdiction of the Court to see mortgagees exercising their rights under the mortgage provisions to retain moneys from the proceeds of their sale of mortgaged property to cover costs that might be incurred after the sale in dealing with unregistered equitable interests and the costs of paying disputed moneys into Court pursuant to s 69(1) of the Trustee Act 1958 (Vic) and s 77(3)(d) of the Transfer of Land Act 1958 (Vic).
[64]Sixth defendants’ defence and counterclaim, [184] – [184F] referring to Memorandum of common provisions AA2712. Seventh defendants’ defence and counterclaim, [161] – [171] referring to Memoranda of common provisions AA689 and AA2712.
There is a further matter that was not the subject of argument. As I have mentioned, Garland claims in its statement of claim that the Retained Funds should be applied first in payment of the liquidators expenses properly incurred in preserving, realising and getting in the Retained Funds.[65] This is no more and no less than the exercise by the Liquidator of his lien over funds realised in the course of his administration. The moneys recovered by the Liquidator are subject to an equitable lien or charge in favour of the Liquidator for the expenses reasonably incurred in ‘the care, preservation and realisation’ of Garland’s property.[66] That lien takes priority over a secured creditor’s charge, as well as over the claims of unsecured creditors.[67]
[65]Statement of Claim, [184].
[66]In re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171, 174–5; Stewart v Atco Controls Pty Ltd (in liq) (2014) 252 CLR 307, 317–8 [11]–[13], [22]–[23]; See also Timbercorp Finance Pty Ltd (In Liq) v Tomes [2015] VSCA 322, [27].
[67]Timbercorp Finance Pty Ltd (In Liq) v Tomes [2015] VSCA 322, [27].
In Timbercorp Finance Pty Ltd (In Liq) v Tomes, Timbercorp contended that an assurance by the liquidators, as officers of the court, that if the cash funds available to the company in liquidation were not sufficient to meet the respondent’s costs, the liquidators would exercise his lien so as to meet the costs order.[68] In that case, McLeish JA (with whom Santamaria JA agreed) noted that:
Timbercorp submits that the lien arises in respect of costs and expenses incurred by the liquidators, not only in their own right but on behalf of the company. Mr Tomes, to the contrary, contends that the assurance is unsatisfactory because it could only apply to costs incurred by the liquidators personally.[69] In the absence of full argument, it would not be desirable to enter into this question.[70]
[68]Timbercorp Finance Pty Ltd (In Liq) v Tomes [2015] VSCA 322, [23] –[28].
[69]Both parties relied on passages in Stewart v Atco Controls Pty Ltd (in liq) (2014) 252 CLR 307. Timbercorp relied further on an argument by analogy with s 556(1)(a) of the Corporations Act 2001.
[70]Timbercorp Finance Pty Ltd (In Liq) v Tomes [2015] VSCA 322, [28].
In this case, the Liquidator has always been a party and, although the claims made against the Mortgagee defendants and against Zeninvest are made by Garland, it may be within the discretion of the court to make an order for costs against the liquidator personally. It is he that is responsible for the decision to launch the claims. Indeed, the evidence shows clearly that the Liquidator has been funding the proceedings out of his own resources and not out of any resources of Garland.[71] This matter, however, was not argued and I will not consider it further
[71]As at 9 June the Liquidator’s personal funding of the litigation amounted to $188,182.63: Liquidators Circular to Creditors dated 9 June 2020, exhibit RAK-1 to the affidavit of Radhika Kanhai made 20 June 2020, page 338.
Prospects of success
Garland’s claims against Zeninvest and against the Mortgagee defendants clearly disclose viable causes of action and are brought bon fide. The defences of Zeninvest are difficult to assess in absence of the evidence, but also appear to be bona fide. The defences raised by the Mortgagee defendants are also bona fide and raise viable defences, especially in relation to the claims that the retention of commission by Payton Property contravene the identified provisions of the Estate Agents Act. In that regard, the submissions of the Mortgagee defendants as to the proper construction of the several provisions of the Estate Agents Act relied on by Garland and their application to the Agency Agreements are, at first blush, persuasive. In the interests of not determining ultimate issues, I will say no more about it. In addition, as I have said, the prospects of the Mortgagee defendants establishing that their costs in this proceeding, if they are successful, are costs and expenses incurred or paid by the mortgagees in connection with each mortgage are good. If that is so, Garland, as the mortgagor, is liable for them, and they are secured under each mortgage and have priority over any other secured interest, other than the Liquidator’s lien, which is an equitable charge having priority to that of the secured creditor.[72]
[72]Stewart v Atco Controls Pty Ltd (in liq) (2014) 252 CLR 307, [22]–[23].
Therefore, in relation to the claims of Garland and the defences of the Mortgagee defendants, with the exceptions I mention in the last paragraph, the position is substantially neutral. I will, accordingly, proceed on the basis that the claims and defences are bona fide with reasonable prospects of success.
Whether that the Mortgagee defendants have caused or contributed to financial position of Garland
Submissions
Garland submitted that if Garland is considered impecunious to an extent that the Court considers that the threshold condition is satisfied, its current financial position is a product of the Mortgagee defendants’ conduct. Garland referred to the law canvassed in my earlier decision in Coonwarra Pty Ltd v Cornonero Pty Ltd (No 2).[73]
[73][2019] VSC 702.
Garland submitted that the evidence makes it possible to conclude that Garland’s present impecuniosity may have been caused or contributed to by the conduct of the Mortgagee defendants. Put simply, the Mortgagee defendants’ payment of excessive commission (including to a party related to the mortgage manager and to an entity with no legal entitlement to those sums) and payment of other amounts has served to deprive the Company of funds to which it was otherwise entitled as mortgagor.
Before the cross-examination of Mr Velos, the position of Garland in relation to the sale of lot 213 in the Atrium was that Southage, as one of the seventh defendants, applied for security in circumstances where it (not Garland) received an amount of $127,604.01 (the Purported Loan Payout) from the sale proceeds of lot 213. But still, even though the evidence of Mr Velos is that this sum went to the payment of land tax, it is in most unusual circumstances. The circumstances are unusual because, it would seem, that as between Garland and Steer, the only moneys owing under the Steer mortgage was approximately $38,000. Southage purchased the mortgage from Steer and promptly, as against Garland, used the outstanding unused limit of the facility to pay land tax not due in respect of the particular lot. That is the case if the recollection of Mr Velos is accurate.
The Mortgagee defendants submitted that:
(a) the Company was wound up on 6 July 2018. The order was made on the application of the Deputy Commissioner of Taxation.[74] The DCT claimed a debt of $1,931,562.91. Against that background, the Company does not explain how the costs incurred by the Mortgagee defendants in selling properties has caused the Company’s impecuniosity.; and
(b) it is also difficult to see why the proceeds of sale of lot 213, if it were the subject of a proper pleading, affects the argument. There is no proper pleading that puts the validity of the loan payout in issue. All that the Company pleads is that the entitlement of Southage to the proceeds of sale is ‘not apparent’. That is not an allegation of fact or law. Garland sought leave to cross-examine Mr Velos on the basis that it is as an opportunity to bolster the evidentiary foundation. There is no foundation to build on.
[74]Affidavit of Stephanie Davies sworn 5 September 2019, exhibit SKD 14, Report to creditors dated 14 May 2019.
Consideration
It is always difficult to resist an application for security on the basis that the plaintiff’s impecuniosity has been caused or contributed to by the conduct of the applicant for security. This is because the plaintiff has the burden of persuasion, based on admissible evidence, on the question whether the conduct of the defendant was a cause of, or contributed to, the plaintiff’s financial difficulties and there must be a solid foundation for that conclusion.[75] It is a factor often raised in conjunction with another factor, that an order for security may stultify the litigation or be otherwise oppressive.[76]
[75]Coonwarra Pty Ltd v Cornonero Pty Ltd & Ors [2018] VSC 333, [6]–[7]; Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311 [20(b)].
[76]Coonwarra Pty Ltd v Cornonero Pty Ltd & Ors [2018] VSC 333, [6]–[7]; Australian Quarry Holdings Pty Ltd (in liq) v Dougherty & Ors (1992) 8 ACSR 569, 570.
The proposition that the impecuniosity of Garland has been caused or contributed to by the Mortgagee defendants does not, in my view have a solid foundation. As the Mortgagee defendants point out, the insolvency of Garland is pre-existing fact and its winding up is a product of the non-payment of the debt due to the DCT. That is a much bigger issue than the breaches of duty and non-compliance with the October 2018 Order alleged against the Mortgagee defendants.
To sustain the proposition that the impecuniosity of Garland has been caused, or contributed to, by the actions of the Mortgagee defendants, it would be necessary to focus only upon the Retained Funds rather than the financial position of Garland as a whole. For the proposition to have a solid foundation, it would be necessary to find that Garland’s prospects of success against the Mortgagee defendants are extremely high, so as to establish that but for the breaches by the Mortgagee defendants the Retained Funds would be greater by an amount equal to the recovery expected by Garland from them. It is not possible to do that on the material available to me.
Whether the order for security will or may stultify the claim by Garland against the Mortgagee defendants.
Submissions
Garland submitted:
(a) To date, the Liquidator has personally funded Garland’s conduct of the proceeding. The affidavit of Radhika Kanhai exhibited two separate circulars issued following the making of the security for costs applications asking whether creditors are willing to support the prosecution of the litigation by way of funding or indemnity.[77] As Garland’s creditors were advised by the Liquidator, if security was to be ordered, particularly in the quantum sought, there is a real risk that the further conduct of the claim will be stultified. Litigation funding has not been secured and no creditors have offered to fund the conduct of the proceeding.
[77]Circular to Creditors dated 9 June 2020 (pages 334-340 of exhibit RAK-1 to the Affidavit of Radhika Kanhai made 20 June 2020) and Circular to Creditors dated 19 June 2020 (exhibit RAK-2 to the Affidavit of Radhika Kanhai made 20 June 2020).
(b) As was observed recently by this Court, the Court would be reluctant to make an order that would confer a ‘victory’ on defendants without any contest.[78] Where (as in the present case) the plaintiff company is in liquidation, the fact that the proceeding will, if successful, benefit the creditors of the company is a relevant consideration. In Australian Quarry Holdings Pty Ltd (in liq) v Dougherty (1992) 8 ACSR 569, Ormiston J made the following observation:
[78]Oakmont Properties Pty Ltd v Duan Lan Zhang & Anor [2019] VSC 568, [66].
…where a liquidator has obtained advice that serious claims should be pursued and that they have reasonable prospects of success (as in the present case) then a court is entitled to have some regard to that opinion upon an application for security for costs, if the object of the liquidator in bringing the action is to provide funds to pay creditors.[79]
[79](1992) 8 ACSR 569, 572.
(c) Similar considerations were determinative in Spiel v Commodity Brokers Australia Pty Ltd (in liq):[80]
But these considerations were, in my opinion, insufficient to justify the ordering of security. The fact was that such an order would have produced victory for the appellant without a contest. The respondent would have been prevented from proceeding with an arguable case legitimately instituted. The hardship to creditors produced by such a course would, in my opinion, far outweigh the hardship which possible inability to recover costs may cause the appellant.
I think it relevant in the exercise of discretion to remember that the claim is really being brought by the liquidator. He is an officer of the court. He has available to him information which reasonably suggests to him that the appellant owes a substantial sum to the respondent. His duty is to take reasonable steps to recover what he can for creditors and shareholders. Moreover he has a duty to the court. I need not dwell on that duty.
In my opinion, it would be unjust and inequitable to impose on the respondent the burden of providing security for the appellant’s costs. I think that the easy victory which an order for security would produce would cause greater hardship than would the possibility that the appellant will not be able to collect costs ordered in his favour.[81]
[80](1983) 8 ACLR 410.
[81](1983) 8 ACLR 410, 416.
Garland submitted that these observations are applicable here, the Liquidator having determined, presumably on advice, that serious claims should be pursued and that they have reasonable prospects of success. The Court is entitled to have some regard to that opinion where the object of the Liquidator bringing the action is, as is the case here, to provide funds to pay creditors. If security is ordered, the Liquidator will be prevented from proceeding with an arguable case legitimately instituted. The hardship to creditors produced by such a course would outweigh the hardship which the possible inability to recover costs may cause the Mortgagee defendants.
Garland submitted that the order made by Garde J was clear, and the evidence before the court, including the evidence of Mr Velos in cross-examination, raises a real prospect of noncompliance. On any view, a payment of 8.8 per cent commission (8% plus GST) to an entity (Payton Property) related to the mortgage manager (Payton Securities) and the situation concerning the disbursement of the sale proceeds from lot 213 warrant scrutiny.
The Mortgagee defendants submitted that while the liquidator commenced this proceeding on the basis that he was funding it (which can only mean forgoing immediate payment of his costs),[82] by 3 April 2020 he made application for the release of a sum of $216,981.66 to satisfy his own remuneration, as well as other costs. That decision was taken after the directions hearing on 27 March 2020 when the Mortgagee defendants sought that no orders for discovery be made pending the filing of the applications for security.
[82]Report to creditors dated 9 June 2020, exhibit RAK-2, affidavit of Radhika Kanhai made 20 June 2020.
Consideration
There is force in the proposition that a security for costs application should not be permitted to frustrate a claim that has been assessed by a court appointed liquidator as being meritorious and being in the creditors’ interests to pursue, and particularly where there are genuine issues about whether there has been compliance with an order made by this court.
Clayton JR noted in Oakmont Properties Pty Ltd v Duan Lan Zhang & Anor[83] that:
The prospect that an arguable case would be stultified by an order for security has been considered at length in the authorities.[84] The Court is reluctant to make an order that would confer a ‘victory’ on Mortgagee defendants without any contest.[85]
Whilst stultification of a proceeding usually operates as a powerful factor in favour of exercising the court’s discretion in the plaintiff’s favour,[86] the authorities require that a company asserting that an order for security will frustrate the litigation also establish that “those who stand behind it and who will benefit from the litigation if it is successful … are also without means”.[87]
[83]Oakmont Properties Pty Ltd v Duan Lan Zhang & Anor [2019] VSC 568, [66]-[67].
[84]See for example MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97; Drumdurno Pty Ltd v Braham (1982) 42 ALR 563; Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507; Excelsior Run Pty Ltd (in liq) v Nelius Pty Ltd [2001] VSC 161; Fiduciary Ltd v Morningstar Research Pty Ltd(2004) 208 ALR 564, 581-582 [72].
[85]Spiel v Commodity Brokers Australia Pty Ltd (in liq)(1983) 35 SASR 294, 301-2 (Bollen J); Fiduciary Ltd v Morningstar Research Pty Ltd(2004) 208 ALR 564, 581-582 [72];
[86]Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542, 545 (Clarke J); See also Idoport Pty Ltd v National Australia Bank; [2001] NSWSC 744, [50] (Einstein J);
[87]Bell Wholesale Co Pty Ltd v Gates Expert Corp No 2(1984) 2 FCR 1, 4; adopted by the Victorian Court of Appeal in Livingspring Pty Ltd v Kliger Partners(2008) 20 VR 377.
The question in respect to this ground is whether it is necessary for Garland to establish that those who stand behind Garland (its creditors), and who also stand to gain by the proceeding being successfully prosecuted, need to be shown to also be without funds or whether it is sufficient that they are simply unwilling to make any contribution to the costs of proceeding further?
In Livingspring Pty Ltd v Kliger Partners the Court of Appeal said:[88]
There are, of course, particular discretionary matters of which the plaintiff must necessarily have carriage. If, for example, the plaintiff corporation asserts that an order for security would impose on it such a financial burden as would stultify the litigation, the plaintiff must establish the facts which make good that assertion. We respectfully adopt what the Full Federal Court said in this regard in Bell v Wholesale Co Pty Ltd v Gates Export Corporation (No 2):
In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for a party seeking security to raise the matter, it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of the security will frustrate the litigation to raise the issue of impecuniosity of those whom the litigation will benefit and to prove the necessary facts.
[88](2008) 20 VR 377, 383 [22].
In Australian Quarry Holdings Pty Ltd (In Liq) v Dougherty & Ors,[89] Ormiston J (as he then was) referred to this passage from Bell v Wholesale Co Pty Ltd v Gates Export Corporation (No 2), and went on to qualify the statement in this way:
There can be no doubt that there is inadequate information before the court as to the capacity of Witace Pty Ltd, Mr Wells or any other person behind the plaintiff company to provide security. Even on Mr Home’s affidavit “unwillingness” is not equivalent to inability to fund the litigation or provide security.
On the other hand the observations of the Federal Court may in some circumstances be rather too sweeping where a company is in liquidation. It was submitted that a company in liquidation ought not to be required to provide any security if the liquidator wishes to pursue a claim. Such a contention misunderstood a number of authorities which merely deny that a liquidator, when bringing a claim as such in his own name, can be required to provide security. Nevertheless there is authority for the proposition that the views of the liquidator should be given some weight in considering the various relevant factors. In my opinion, where a liquidator has obtained advice that serious claims should be pursued and that they have reasonable prospects of success (as in the present case) then a court is entitled to have some regard to that opinion upon an application for security for costs, if the object of the liquidator in bringing the action is to provide funds to pay creditors.[90]
[89](1992) 8 ACSR 569.
[90]Ibid, 571-2.
This statement demonstrates the danger in fettering the Court’s discretion by reference to fixed positions stated in other cases by reference to the facts in those cases. It has been said time and again that the discretion is unfettered and should not be approached with any predisposition at all. As Bollen J said in Spiel v Commodity Brokers Australia Pty Ltd (in liq):[91]
The judge or magistrate must decide according to his view of the justice of the case. There should be no complaint at the imprecision of that statement. Beyond saying that the judge or magistrate must behave judicially one cannot define or delimit or categorise the circumstances in which security should be ordered to be given.[92]
[91](1983) 8 ACLR 410 (Zelling and Wells JJ agreeing).
[92]Ibid 415.
If the Court concludes that it would be unjust and inequitable to impose on Garland in this case the burden of providing security for the Mortgagee defendants’ costs, then the fact that the creditors are unwilling as distinct from unable to assist the company in liquidation should not stand in the way of finding against an order for security. It seems likely that an order for security would give to the Mortgagee defendants an easy victory and cause greater hardship than would the risk (and for the reasons given above, not a great risk) that the Mortgagee defendants will not be able to collect costs ordered in their favour.
In this regard, it needs to be recalled that both sets of Mortgagee defendants have withheld funds from the proceeds of sale to cover what they had anticipated were the likely costs of this proceeding, which they say, of course, was based on an underestimation of the costs likely to be incurred as matters have turned out. In the case of the sixth defendants, some $15,500 was withheld by Mr Velos from the sale of lot 213 and paid to the solicitors for the sixth defendants. The seventh defendants withheld the additional sum from the proceeds of sale of lot 122 in the sum of $12,563.83[93]
[93]Affidavit of Bill Velos made 4 October 2019, [18]. It appears more likely in fact that this sum is the balance withheld from the sale of lot 213: compare the Trust Account Statement dated 8 August 2019 at exhibit RK-1, page 95, to the affidavit of Radhika Kanhai made 20 June 2020 with the Trust Account Statement dated 15 August 2019 at exhibit BV-7 to the affidavit of Bill Velos made 4 October 2019.
Delay
Submissions
Delay in applying for security may be ground for refusing to order security. In this case, Garland contended that the Company was entitled to know its position in relation to security at the outset, and before it embarked to any real extent on its litigation, and certainly before it made a substantial financial commitment toward litigating the claim.[94] The financial position of the Company was confirmed in early September 2019 in an affidavit filed in this proceeding on behalf of the Liquidator.[95] In that affidavit, it was revealed that the assets of Garland are primarily comprised of the Retained Funds and the only other asset was an amount of approximately $8,897.47. Accordingly, there are almost no assets from which the Liquidator could seek to have his remuneration and costs paid other than the Retained Funds. The issue of the ability of Garland to meet their costs was raised on behalf of the Mortgagee defendants in correspondence in November 2019. But no application was made until May 2020. Garland submitted that the Mortgagee defendants’ delay, along with the failure to provide any explanation for that delay, weighs against making orders for security for costs.
[94]Oswal v Australia and New Zealand Banking Group Ltd [2016] VSC 52 (per Sifris J), [34]; Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311, [20(f)], citing Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301, at 309.
[95]Affidavit of Stephanie Kate Davies dated 5 September 2019, [18]-[20]
Garland submitted that the delay also serves to disentitle the Mortgagee defendants from receiving security for past costs. In the case of the sixth defendants, the security sought for past costs is $122,944.50 (compared to future costs estimated at $78,271.05). The seventh defendants claimed costs up to 25 April 2020 of $66,306.64 and $66,678.45 for costs from 26 April to the mediation. As Sifris J confirmed in The Oswal matters – application for security for costs,[96] a judgment that entailed a comprehensive survey of the authorities regarding security for past costs, delay is often a decisive factor in deciding whether to order security and in particular security for past costs:
The main reason is that by such delay, the defendant has permitted the plaintiff, during the period of the delay, to incur costs, and often substantial costs, that may not have been incurred had the application been made promptly. If a plaintiff proceeds on the assumption that no such application will be made, it may be harsh and unfair to require security for such past costs.[97]
[96][2016] VSC 52.
[97]Ibid, [34].
In The Oswal matters – application for security for costs,[98] Sifris J observed that, despite delay, security may be granted for past costs (in whole or in part) where it is established that there is some conduct that negates the prejudice, harshness, or oppression, that is otherwise apparent when there is a delay and substantial costs have been incurred.[99] In the absence of such conduct in the present case, no security should be ordered for past costs.
[98][2016] VSC 52.
[99]Ibid, [44(d)].
The Mortgagee defendants submitted that they requested the liquidator inform them of Garland’s ability to make good on a costs order in November 2019. In the subsequent correspondence, Garland asserted that the Retained Funds were available to satisfy a costs order in the requisite sense. By letter dated 6 December 2019 the Seventh Defendants’ solicitors sought to obtain a proper response and by letter dated 19 February 2020 Garland’s solicitors simply restated their position.
The Mortgagee defendants issued their applications before the close of pleadings. They contended that is both conventional and completely acceptable in the circumstances of this case, because the parties were still trying to find their feet with disputes within the pleadings, and it was quite proper to wait to see what the pleadings actually said.
Consideration
While it is true that each of the Mortgagee defendants raised the issue of the ability of Garland to meet an order for costs as long ago as November 2019, that it is not an answer to the proposition that that application should have been, and was not, made promptly. The longer the delay, and the greater the costs the plaintiff has been allowed to incur, the less likely it is that an order for security will be made.[100]
[100]LRSM Enterprises Pty Ltd v Zurich Australia Insurance Ltd [2013] NSWSC 324, [56], citing Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 123-124 per Waddell J; The Oswal matters – application for security for costs, [2016] VSC 52 [36].
The Mortgagee defendants knew what the principal claims were from the time in early to mid-August 2019 when the Liquidator queried the estate agents’ commission of 8% plus GST, the giving of rebates to purchasers and the extent of other costs deducted. They did not need to wait for the close of pleadings before launching their applications.
They knew from the responsive letters of 5 December 2019 that the Retained Funds were the main pool of assets available Garland and the Liquidator and that if the Mortgagee defendants were successful in their claim to a first ranking security interest in that fund, that was the source of their recovery. They also knew from the affidavit of Davies referred to in those letters and from the Liquidators Reports to Creditors that the assets available to defray the costs of the proceeding were effectively limited to the Retained Funds.
They did nothing to pursue a claim for security until mid-May 2020, by which time a very large part of the costs to be incurred by the liquidator in the proceeding against the Mortgagee defendants, and against Zeninvest, must have been incurred. Although there is no evidence of prejudice to Garland arising from the lateness of the applications, the lack of such evidence is not sufficient to rebut the inference of prejudice. To establish prejudice from delay, it is not necessary that the plaintiff prove what the plaintiff would have done if the application had been made earlier. Where substantial costs have been incurred since the time when an application for security should have been brought, it would be unreasonable to deny the existence of prejudice.[101]
[101]Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; 67 ACSR 105, (Hodgson JA, with whom Basten and Campbell JJA agreed), [57]; LRSM Enterprises Pty Ltd v Zurich Australia Insurance Ltd [2013] NSWSC 324, [60]; The Oswal matters – application for security for costs, [2016] VSC 52 [36].
The delay in this case has not been long, perhaps 6 months, by comparison with other cases where delay has been found to be significant. But here, the pleadings were effectively complete, discovery was partially dealt with, and will, by the time these reasons are published, be complete. Mr Velos warned the Liquidator in his affidavit of 4 October 2019, well before the joinder of Garland as a plaintiff, that if the matter was pressed the seventh defendants would seek security for their costs, but did nothing about it when the time came to do so, shortly after the filing of the Statement of Claim.
The letters sent by the Mortgagee defendants on 22 November 2019, before the filing of the Statement of Claim, did not, in terms, threaten an application for security. They merely enquired as to the resources available to Garland to pay costs orders in the proceeding.[102] After receiving the Liquidators response on 5 December 2019, on 6 December 2019 Mr Velos again wrote, in effect, arguing that the response that the Retained Funds would available was wrong, and that the Liquidator would not have a Universal Distributors’ lien over the Retained Funds, and again asking what resources the Liquidator may provide for the seventh defendants’ costs.[103] The letter from Harding Stenning & Co was similar.[104] When on 19 February 2020, Cornwalls responded on behalf of Garland by repeating what they had previously said, Mr Velos replied promptly on 24 February 2020 that the response was inappropriate ‘and we expect a detailed, thorough and prompt response.’[105] He did not get one. What is the Liquidator to think? Have they given up? What is happening? There was no demand for security for costs expressly until the summons was issued. So Garland (by the Liquidator) pressed on, as ordered to do so by the Court. There was no choice but to incur costs in progressing the proceeding during the whole of the period from January, or early February, through to the issue of the applications in May 2020.
[102]Velos affidavit, exhibit BV-6. Stenning affidavit, exhibit RS-1.
[103]Velos affidavit, exhibit BV-9.
[104]Stenning affidavit, exhibit RS-4.
[105]Velos affidavit, exhibit BV-11. Harding Stenning & co did not respond at all.
I am not in a position to determine how much of the costs expended by the Liquidator in the proceeding relate to the claims against the current active defendants, particularly the Mortgagee defendants, but my review of the file indicates it will be a very significant part of the costs of over $188,000 incurred by the Liquidator. It is the Liquidator who in every relevant respect is responsible for Garland pursuing this proceeding, and he is incurring the costs. The prejudice to Garland is prejudice to him.
In my view, the delay in this case is significant in the circumstances and is another factor that goes to the exercise of the Court’s discretion to refuse to order security for the Mortgagee defendants’ costs.
Conclusion
I am relieved from undertaking the often vexing task of assessing the appropriate amount of be provided as security for the defendants costs, as I have come to the conclusion that in this case the proper exercise of the Court’s discretion is that the applications for security should be refused. Essentially, this is because it would be unjust and inequitable to impose on Garland the burden of providing security for the Mortgagee defendants’ costs where:
(a) the risk that Garland will not be able to pay the Mortgagee defendants costs is low;
(b) an order for security would be likely to stultify the proceeding; and
(c) by their conduct in delaying their applications, the Mortgagee defendants have prejudiced Garland and the Liquidator.
The Mortgagee defendants’ summonses seeking security for their costs will be dismissed with costs.
SCHEDULE OF PARTIES
S ECI 2018 01420
GREGORY STUART ANDREWS (in his capacity as Liquidator of Garland Projects Pty Ltd (ACN 156 037 848) First Plaintiff GARLAND PROJECTS PTY LTD (ACN 156 037 848) Second Plaintiff ZUCCUBARR PTY LTD (ACN 006 062 719) First Defendant ZENINVEST PTY LTD (ACN 104 815 876) Second Defendant RILL TRADING RESOURCES INCThird DefendantTESKA & CARSON PTY LTD (ACN 060 569 502)Fourth DefendantEPB NOMINEES PTY LTD (ACN 005 159 160), The Winepress Berwick Assembly of God Church Inc, Judith Lawrence Payton, Flocar Pty Ltd (ACN 005 436 886), David John Payton, Paul Timothy Payton, Timothy Joseph Payton, Maahu Amble Pty Ltd (ACN 167 652 968)Fifth DefendantD.W. Boulter Pty Ltd (ACN 082 933 757), Selvadural Sivakumaran Atputhalamar Sivakumaran, Jem Scanlon Pty Ltd (ACN 130 889 477), Oei Beng Tjeh, Chong Ngien Cheong, Cornelis Brouwer, Jantje Brouwer, Steer Inc, Robert John Munns, Lenore Ann Munns and others Sixth Defendant Southage Pty Ltd (ACN 050 240 965) and Eben Nominees Pty Ltd (ACN 004 960 892) Seventh Defendant D.W. Boulter Pty Ltd (ACN 082 933 757), Selvadural Sivakumaran Atputhalamar Sivakumaran, Jem Scanlon Pty Ltd (ACN 130 889 477), Oei Beng Tjeh, Chong Ngien Cheong, Cornelis Brouwer, Jantje Brouwer, Steer Inc, Robert John Munns, Lenore Ann Munns and others Plaintiff by 1st Counterclaim Southage Pty Ltd (ACN 050 240 965) and Eben Nominees Pty Ltd (ACN 004 960 892) Plaintiff by 2nd Counterclaim GREGORY STUART ANDREWS (in his capacity as Liquidator of Garland Projects Pty Ltd (ACN 156 037 848) First Defendant by 1st Counterclaim GARLAND PROJECTS PTY LTD (ACN 156 037 848) Second Defendant by 1st Counterclaim GREGORY STUART ANDREWS (in his capacity as Liquidator of Garland Projects Pty Ltd (ACN 156 037 848) First Defendant by 2nd Counterclaim GARLAND PROJECTS PTY LTD (ACN 156 037 848) Second Defendant by 2nd Counterclaim
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