Brecher v Barrack Investments Pty Ltd

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FEDERAL COURT OF AUSTRALIA

Brecher v Barrack Investments Pty Ltd [2018] FCA 472

File number: NSD 1507 of 2017
Judge: THAWLEY J
Date of judgment: 9 April 2018
Catchwords: PRACTICE AND PROCEDURE – Security for costs – where application sought against corporate applicant but not individual applicant – whether there is reason to believe that the corporate applicant will be unable to pay costs if unsuccessful – where the claims of the corporate and natural applicants share a common factual substratum – whether causes of action of corporate applicant result in costs greater than would be incurred in meeting claims of the individual applicant – where incremental costs not established – whether the discretion to order security for costs should be exercised – whether undertaking given by the natural applicant is relevant to the exercise of the discretion to award security for costs
Legislation:

Corporations Act 2001 (Cth) s 1335

Federal Court Act 1976 (Cth) ss 37M, 56  

Federal Court Rules 2011 (Cth) r 19.01

Cases cited:

ACN 105 921 962 Pty Ltd v Dominic Wiggett [2012] NSWSC 1526

Austcorp Project Number 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371

Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972

Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564

Funds First Pty Ltd v Owners Corporation Strata Plan 66609 (No 2) [2008] NSWSC 428

GG Australia Pty Ltd v Sphere Projects Pty Ltd (No. 2) [2017] FCA 664

Harpur v Ariadne Australia Ltd [1984] 2 QdR 523

Hii v Federal Commissioner of Taxation (No 3) (2016) 238 FCR 304

Jazabas Pty Limited v Haddad (2007) 65 ACSR 276

Ken Tugrul v Tarrants Financial Consultants Pty Limited ACN 086 674 179 [No 4] [2014] NSWSC 291

KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995)  56 FCR 189

Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377

Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317
Date of hearing: 4 April 2018
Registry: New South Wales
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: Commercial Contracts, Banking, Finance and Insurance
Category: Catchwords
Number of paragraphs: 35
Counsel for the Applicants: Mr Condon SC and Mr Sharp
Solicitor for the Applicants: Access Law Group
Counsel for the First, Second and Third Respondents: Mr Sleight
Solicitor for the First, Second and Third Respondents: Neville and Hourn Legal

ORDERS

NSD 1507 of 2017
BETWEEN:

ERIC SCOTT BRECHER

First Applicant

ERIC BRECHER PTY LIMITED

Second Applicant
AND:

BARRACK INVESTMENTS PTY LIMITED (ACN 083 617 421)

First Respondent

DELBEST PTY LIMITED (ACN 003 236 502)

Second Respondent

MOHAMAD KHALID RASHID (and others named in the Schedule)

Third Respondent

IN THE INTERLOCUTORY APPLICATION:
AND BETWEEN:

BARRACK INVESTMENTS PTY LIMITED (ACN 083 617 412) (and others named in the Schedule)

First Applicant
AND:

ERIC BRECHER PTY LIMITED

Respondent

JUDGE:

THAWLEY J

DATE OF ORDER:

9 APRIL 2018

THE COURT ORDERS THAT:

1.The interlocutory application is dismissed.

2.The proceedings are listed for argument on costs (in…

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Details
Case
[2018] FCA 472
Decision Date

CaseChat Overview and Summary

The case of Brecher v Barrack Investments Pty Ltd involved an application for security for costs by the first and second applicants, Dr Eric Brecher and Eric Brecher Pty Ltd (EBPL), against the third to sixth respondents. The applicants sought an order for the respondents to provide security for the costs of the proceedings, arguing that there was a reason to believe that EBPL would be unable to pay costs if unsuccessful. The respondents opposed the application, contending that the applicants had not established that there were incremental costs associated with the corporate applicant that would not be incurred in meeting the claims of the individual applicant. The primary issue for the court was whether the discretion to order security for costs should be exercised in favour of the applicants.

The court considered the evidence and submissions of both parties and found that, while the applicants had not established the incremental costs associated with the corporate applicant, there was reason to believe that EBPL would be unable to pay costs if unsuccessful. The court noted that EBPL was a trustee company and that security for costs would typically be ordered against such a company if it could not establish that recourse to property held by it would be available and adequate to meet a potential costs order. The court also found that the causes of action of the corporate applicant resulted in costs greater than would be incurred in meeting the claims of the individual applicant, and that the undertaking given by the natural applicant was relevant to the exercise of the discretion to award security for costs. However, the court ultimately dismissed the interlocutory application, noting that the quantum of security was necessarily impressionistic and involved the balancing of the interests of both parties.

In summary, the court found that there was reason to believe that EBPL would be unable to pay costs if unsuccessful, but declined to exercise its discretion in favour of the applicants due to the lack of evidence regarding the incremental costs associated with the corporate applicant. The court dismissed the interlocutory application and listed the proceedings for argument on costs and a case management hearing.

Orders

Orders of the court

1. The interlocutory application is dismissed.

2. The proceedings are listed for argument on costs (in the absence of agreement between the parties) and for a case management hearing at 9am on 13 April 2018.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

An application for security for costs had also been made by the fourth and fifth respondents. That application was resolved between the relevant parties and orders were made by consent for the applicants to provide security in the amount of $18,500.00.BACKGROUND The first applicant is Dr Eric Brecher (Dr Brecher). The second applicant is Eric Brecher Pty Ltd (EBPL). Dr Brecher is the sole director of, and shareholder in, EBPL. EBPL is the trustee of the South Coast X-Ray Unit Trust (the assets of which are the subject of the proceedings) and the Eric Brecher Discretionary Trust (which does not have any assets). EBPL, as trustee of the South Coast X-Ray Unit Trust, owned and operated a radiology practice conducted from leased premises at Dapto, trading as “South Coast X-Ray”. In order to acquire and conduct this business, EBPL had entered into certain leases and obtained finance on security. It had borrowed money from Dr Brecher, Medfin Australia Pty Ltd (Medfin) and the Bank of Queensland (BOQ). The Medfin and BOQ facilities were secured, including by a guarantee given by Dr Brecher. EBPL had entered into leases with GE Capital for the lease of equipment and granted security over the leased equipment. The first respondent is Barrack Investments Pty Limited (Barrack Investments). It has two issued shares one of which is registered in the name of Dr Rashid, the third respondent (Dr Rashid). Dr Rashid is a medical doctor. He is a director and shareholder of Romore Pty Ltd (Romore). Barrack Investments is the registered proprietor of land known as “Centre Health Area Building” at Barrack Heights (Barrack Heights Centre). The second respondent is Delbest Pty Ltd (Delbest). It has two issued shares one of which is registered in the name of Mr Rashid. The fourth respondent is Mr Agarwal, who is a lawyer and director of the fifth respondent, Acorn Lawyers Pty Ltd (Acorn Lawyers). The employees of Acorn Lawyers included a solicitor, Mr Musumeci. The sixth respondent is South Coast Medical Imaging Pty Ltd as trustee for the South Coast Medical Imaging Unit Trust (administrator appointed) (ACN 608 363 140) (SCMI). The allegations made by the applicants, as pleaded in the statement of claim, may be summarised for present purposes as follows:(1)Before and during October 2015, Dr Brecher and Mr Rashid discussed the possible establishment of a radiology practice (Barrack Heights Practice) at the Barrack Heights Centre. Dr Rashid represented that there would be work for a radiologist at the Barrack Heights Centre and that a previous radiology tenant had left that centre by reason of a dispute it had had with Wollongong Nuclear Medicine, another tenant in the Barrack Heights Centre. Dr Rashid represented that he had 20 full-time GPs working at the centre and was expanding to 40. He was going to bring in multiple specialists, including five obstetricians and gynaecologists. An additional floor was to be added to the medical centre and Dr Brecher did not have to be concerned about the profitability of the practice to be conducted at the Barrack Heights Centre.(2)In mid July 2015, Dr Rashid showed Dr Brecher plans for the Barrack Heights Centre indicating where the 20 new GPs and specialists would practice. He represented that the expansion would be completed by the end of 2019 and undertook to find a neutral lawyer to represent both men and the business to be conducted by them from the Barrack Heights Centre. The Barrack Heights Centre would have enough work to justify the applicants’ involvement.(3)By late September 2015, Dr Rashid and Dr Brecher had agreed that they would own the Barrack Heights Practice 50% each and would operate under the name “South Coast X-Ray”. The new company would take out a loan to fund the establishment of the Barrack Heights Practice. Decisions would be made jointly, profits would be split 50/50 and they would engage the same lawyer to draft the relevant contracts.(4)SCMI was incorporated on 22 September 2015 and Dr Brecher and Dr Rashid were appointed directors. EBPL and Romore were each issued 100 shares in SCMI and 300 units in the SCMI Unit Trust. (5)In around October 2015, Dr Rashid on behalf of himself and SCMI retained Acorn Lawyers to prepare the relevant legal documents and consider the legal structure for the proposed Barrack Heights Practice. Entities in which Dr Rashid had an interest, namely Delbest and Romore, were current or former clients of Acorn Lawyers. This association was not disclosed to Dr Brecher. Acorn Lawyers prepared a number of documents including a “Shareholders Deed”, a “Deed of Acknowledgement”, a “Services Agreement” between SCMI and Dr Brecher and a “Consultancy Agreement” between SCMI, Delbest and Dr Rashid. It is alleged that the effect of those documents was to advantage the commercial interests of SCMI over those of the applicants and, in turn, Dr Rashid over those of SCMI. This advantaging of commercial interests included that EBPL and Dr Brecher might have to make payments in relation to the existing financing facilities of EBPL notwithstanding that the Deed of Acknowledgement contemplated that SCMI had the right to possession of EBPL’s business assets, the subject of that finance and/or security. (6)On around 15 October 2015, Dr Brecher, his partner, Mr Agarwal, Mr Musumeci and Dr Rashid attended a meeting at the premises of Acorn Lawyers. It is alleged that Mr Agarwal made representations to Dr Brecher that:(a)he and Acorn were representing Brecher, Rashid and SCMI and would be performing work for Brecher;(b)the expected turnover of revenue of the [sic] the Barrack Heights Practice would be $5m for the first year, $7.5m in the second year and $10m in the third year; (c)Rashid would take out a loan in the sum of $2.5m, of which up to $1.5m would be used for the fit out and the balance would be spent on equipment;(d) Rashid would be negotiating the new lease for the Barrack Heights Practice, and the rent would be about $25,000.00 per month;(e) the Barrack Heights Practice would be up and running by 15 January 2016;(f)Rashid would recruit new doctors and build up the number of doctors working at CHMC Barrack Heights;(g)(in response to a statement by Brecher that he had put between $500,000 and $600,000 into the practice and he needed to get that loan back) anything in EBPL’s account was his and Brecher could take that money at any time.It is alleged that Dr Rashid was present and did not contradict or qualify what Mr Agarwal said. It is alleged that Mr Agarwal gave Dr Brecher a brief summary of the documents he and EBPL were to sign and did not advise Dr Brecher that the effect of the documents was to advantage the commercial interests of others over those of EBPL and Dr Brecher. It is alleged that Dr Rashid did not inform Dr Brecher that Dr Rashid had an interest in Barrack Investments or Delbest, the latter of which would or might undertake the fit out works for the Barrack Heights Practice. It is alleged that Dr Brecher and EBPL executed the documents in reliance on the representations set out above.(7)After 15 October 2015:(a)SCMI, through Acorn Lawyers, began discussions with Medfin to seek to effect an assignment of the Medfin facilities from EBPL to SCMI. These were not novated or assumed by or assigned to SCMI. EBPL and Dr Brecher remained bound by securities given to Medfin and BOQ and in relation to other leases. It is alleged that it was unlikely (when the relevant documents including the Deed of Acknowledgement were drafted and executed) that a financier would refinance all of the obligations of EBPL.(b)SCMI entered into a lease of premises (Barrack Heights Premises) at the Barrack Heights Centre with Barrack Investments. Dr Rashid procured that the fit out of the Barrack Heights Premises be undertaken by Delbest. SCMI was charged by Delbest in excess of $1 million and SCMI paid the relevant amount at the direction of Dr Rashid. It is alleged this work could have been undertaken more quickly and at significantly lower cost. The Deed of Acknowledgement had provided that Dr Rashid was authorised to negotiate the terms of the lease of the proposed Barrack Heights Practice with the lessor and to procure the fit out without further approval of the board of SCMI.(c)EBPL transferred the business name “South Coast X-Ray” to SCMI and transferred its employees. It permitted SCMI to use the equipment which EBPL owned or leased, notwithstanding that EBPL remained bound by the terms of the Medfin securities, the BOQ securities and other leasing securities.(8)The Australia and New Zealand Banking Group Limited (ANZ) advanced to SCMI the sum of approximately $1.6 million on terms which required Dr Brecher to execute a guarantee and indemnity in favour of ANZ (ANZ Guarantee).(9)The Barrack Heights Practice commenced providing full services on or about 6 April 2016. It did not generate sufficient revenue to pay overheads and expenses associated with the practice. SCMI continued to make losses and, on 3 July 2017, an administrator was appointed.(10)It is claimed that the Deed of Acknowledgement is void for uncertainty. Clause 3.1 of the Deed of Acknowledgement required EBPL to assign the Medfin securities to SCMI and SCMI to accept such assignment; however, it was not possible to assign the Medfin securities in circumstances where they imposed obligations on EBPL. It is claimed that this has the consequence that the Deed of Acknowledgement is void for uncertainty or, alternatively, that completion never occurred with the result, in either case, that the right and title to the business assets remained at all times with EBPL.(11)It is alleged that Barrack Investments, Delbest and Dr Rashid engaged in misleading or deceptive conduct in the period before and including 15 October 2015 in contravention of section 18 of the Australian Consumer Law (ACL). It is alleged that Dr Brecher and EBPL suffered loss and damage, as follows:i. In the case of EBPL:(a)lost profits;(b)its capital;(c)the value of its business; and (d)the lost opportunity to repay in whole the monies due under the Medfin Facilities, the BOQ Loan, and the All Leasing Securities, or to repay more than anything SCMI caused to pay over 2016 and 2017. ii. In the case of Brecher: (a)as:(i)EBPL ceased trading; and (ii)SCMI did not pay out the Medfin Facilities and the BOQ Loan and the All Leasing Securities or cause them to be repaid as quickly as would have been the case had EBPL continued to trade, he is under a greater financial liability under the guarantees given in support of those facilities;(b)such liability as Brecher has under the ANZ Guarantee; and(c)Brecher has lost income and the opportunity to recover his loans from EBPL.(12)It is also alleged that Dr Rashid, Delbest and Barrack Investments engaged in unconscionable conduct within the meaning of the unwritten law and as otherwise proscribed by section 21 of the ACL. The same particulars of loss and damage are provided as provided in respect of the claimed contraventions of section 18 of the ACL (set out as above).(13)It is alleged that Dr Brecher and Dr Rashid were, in substance, partners who conducted their affairs through corporate entities and that Dr Rashid owed Dr Brecher and EBPL a duty (which was breached) to act in good faith in relation to the formulation and progress of the medical practice to be conducted by SCMI and not to subordinate the interests of Dr Brecher and EBPL to the interests of others. The same particulars of loss and damage are provided as provided in respect of the claimed contraventions of section 18 of the ACL.(14)It is alleged that Acorn Lawyers agreed to be retained by Dr Brecher and EBPL and that the retainer contained a term to the effect that they would exercise reasonable care, skill and diligence. It is alleged that Acorn Lawyers owed Dr Brecher and EBPL duties of a fiduciary nature. It is alleged that the duties arising from the retainer and as fiduciaries were breached with the result that Dr Brecher and EBPL suffered loss and damage.LEGISLATIVE PROVISIONS

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

As to the third issue, the quantum of security is necessarily impressionistic and involves the balancing of the interests of both parties. The Court can bring its experience to bear in assessing an appropriate amount of security, but this does not in any way absolve the applicant for security from discharging its onus of proving the amount of security which would be appropriate. It is also desirable to consider whether there is reason to provide the whole of the security up front, before the respondent in fact incurs portions of the cost referable to the security, or whether the security should be payable in tranches.CONSIDERATIONFirst Issue: Is there reason to believe the EBPL will be unable to pay? The second and third respondents relied on an affidavit of Mr Hourn sworn 1 March 2018 which identified and produced the results of searches of ASIC, the NSW Land Registry and the Personal Properties Security Registrar. He stated he was “unaware of the plaintiff’s [sic – second applicant’s] financial capacity to fund the conduct of these proceedings or meet any costs order … in the event [the first to third respondents were] successful”. The applicants relied upon an affidavit of Dr Brecher sworn 21 March 2018. Dr Brecher stated that he, through EBPL, performed reporting services for various radiology practices which generated income of approximately $90,000 per month. As noted above, EBPL is the trustee of the South Coast X-Ray Unit Trust and the Eric Brecher Discretionary Trust. It was not suggested that this income of $90,000 per month was beneficially that of EBPL. It was accepted in written submissions that EBPL was a trustee company (only) and that security for costs will typically be ordered against a trustee company which is unable to establish that recourse to property held by it will be available and adequate to meet a potential costs order, referring to ACN 105 921 962 Pty Ltd v Dominic Wiggett [2012] NSWSC 1526; and see also Luna Park at [9]. The applicants also accepted, in oral submissions, that security would be ordered if the only applicant were the corporate trustee, EBPL. The written submissions contended that an order for security for costs should not be made (for reasons explained below), but that, if an order for security for costs were made, it should only be in the amount of $14,856. It was not contended that EBPL had the capacity to pay that amount. Although the applicants criticised the second and third respondents for not establishing the incremental costs which would be incurred over and above the costs which would be incurred by them in meeting the individual applicant’s claim, it was not suggested that the corporate applicant had capacity to meet any costs order from assets owned beneficially by it and it was at least implicitly accepted that it could not. Accordingly, in my view, the “jurisdictional issue” is established, notwithstanding the failure (discussed below) to establish what the incremental costs were likely to be. Second Issue: Discretion