Bufalo Corporation Pty Ltd (Rec & man app'td) (in liq) v Primelife Corporation Limited & Ors
[2009] VSC 171
•30 April 2009
IN THE SUPREME COURT OF VICTORIA
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 6668 of 1999
| BUFALO CORPORATION PTY LTD (ACN 007 122 296) (RECEIVER AND MANAGER APPOINTED) (IN LIQUIDATION | Plaintiff |
| - and - | |
| PRIMELIFE CORPORATION LIMITED (ACN 084 563 413) and others | Defendants |
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JUDGE: | JUDD J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 3 December 2008 | |
DATE OF JUDGMENT: | 30 April 2009 | |
CASE MAY BE CITED AS: | Bufalo Corp P/L v Prime Life Corp Ltd & Ors | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 171 | |
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PRACTICE AND PROCEDURE – Security for costs – Case management
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J.R. Dixon SC Ms L.M. Nichols | Tresscox |
| For the First and Fourth Defendants | Mr S.K. Wilson QC Mr P.J. Marzella | Russell Kennedy |
| For the Fifth Defendant | Mr J.P. Gorton | Minter Ellison |
| For the Sixth Defendant | Mr M.L. Sifris SC | Holding Redlich |
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HIS HONOUR:
Introduction
This proceeding was commenced by Notice of Motion dated 30 August 1999 filed in the Corporations List. The applicants were Bufalo Corporation Pty Ltd, Giovanni Bufalo, Guiseppe Bufalo and Antonio Bufalo. Each individual applicant was a director of Bufalo Corporation. The respondents were Prime Life Corporation Ltd, Wattletree Road Developments Pty Ltd, Sale Manor Gardens Pty Ltd and Eduard Christiaan Sent. Although the Notice of Motion and some other Court documents make reference to applicants and respondents, I will adopt the current description of plaintiff and defendants.
The parties to the proceeding have changed and so have the issues, although the underlying grievances remain essentially the same. The directors are no longer parties. They were declared bankrupt. The plaintiff, Bufalo Corporation, is in liquidation. Gregory Stuart Andrews is liquidator. A receiver and manager, Gideon Isaac Rathner, was appointed by Prime Life to take control of its assets. A firm of solicitors, Darrer Muir Fleiter, was joined as the fifth defendant in 2003 and Rathner, was joined as the sixth defendant at the same time. There is a counterclaim by Prime Life.
Before the court are applications by Prime Life, Sent, Darrer and Rathner for further security for their costs. The plaintiff was first ordered to provide security to Prime Life and Sent in 2004 in the sum of $350,000. At about the same time security in lesser amounts was given to Darrer and Rathner, without the need for an order. The amount of the security was for the defendants’ costs up to and including mediation. Prime Life, Sent, Darrer and Rathner now seek further security up to and including trial, although they each acknowledge that an order, if made, should be confined to costs up to and including the first day of trial. Prime Life and Sent also seek to retrospectively top-up the amount of the security already provided.
The total amount of additional security now sought by Prime Life and Sent is $1,681,520.30. The total amount claimed by Darrer is $532,055; and the total amount claimed by Rathner is $603,089. These amounts include claims for the trial, for which estimates vary from 25 to 81 days.
Background
The pleadings and the affidavit material filed by the parties provides sufficient background information for the purpose of the applications. Objection was taken by the defendants to much of the narrative set out in the affidavit of the plaintiffs’ solicitor, Philip Anthony Jones sworn 1 December 2008, on the ground that it was hearsay and argumentative. There was no objection, however, to my relying upon the narrative as a summary of the plaintiff’s factual allegations. A review of the defence of the first and fourth defendants, together with concessions made during the hearing, reveals that there is little, if any, dispute about the events that have occurred. The real dispute relates to the terms of the various agreements mentioned in the pleadings, the validity of security documents executed by the Bufalo parties in January 1999 and the liability of Darrer and Rathner for breaches of duty as solicitor and receiver respectively.
The plaintiff carried on business as a builder specialising in the construction of aged care and special accommodation. In and between 1997 and 1999 the plaintiff undertook property development projects with Prime Life. Prime Life is a listed company, now known as Babcock & Brown Communities Ltd. At relevant times Sent was the managing director of Prime Life.
In August 1998 the plaintiff and Prime Life agreed to acquire a property at 410 Wattletree Road, Malvern and become partners in the resulting development. The plaintiff paid a deposit and Prime Life procured a shelf company to undertake the project. Of 100 issued shares in the capital of Wattletree Road Developments, 51 shares were allotted to Prime Life and 49 shares were allotted to the plaintiff.
In about October 1998 Giovanni Bufalo and Sent agreed that the plaintiff would arrange for the purchase by Prime Life of a half interest in a property at Raglan Street, Sale and a residential service business conducted from the property. The Bufalo family already owned or controlled a half interest in the property and business. The property and business were to be developed, owned and operated as a joint venture.
The plaintiff alleges that in order to facilitate the transaction, Giovanni Bufalo required funds to purchase the interests of the other owners. For that purpose he sought and obtained an advance of $1.125m from Prime Life. Once the acquisition had been made, Prime Life was to contribute equity, the project was be refinanced and Prime Life repaid its loan from project funds.
There is a dispute as to the terms under which the funds were advanced. Security was given by the plaintiff and members of the Bufalo family. The security included a debenture over the assets of the plaintiff. One of the assets of the plaintiff was a substantial holding of shares in Prime Life. The value of the shares exceeded the value of the loan.
The relationship between the Bufalo parties and Prime Life had started to break down soon after the advance was made and the security documents executed. The break down was not confined to the Sale Manor Gardens project. At about that time Prime Life instructed its share registry that the plaintiff’s shares in Prime Life were not available to be traded or sold on the market until further notice.
By their Notice of Motion the Bufalo parties sought orders in relation to Wattletree Road Developments and Sale Manor Gardens. One such order sought the regulation of the affairs of Sale Manor Gardens to ensure that the advance from Prime Life to Giovanni Bufalo was repaid. They also sought an order restraining Prime Life from taking any steps to exercise rights under security given for the loan, including the debenture given by the plaintiff to Prime Life.
In their first statement of claim, dated 22 September 1999, the Bufalo parties alleged a joint venture agreement between Bufalo Corporation and Prime Life for the purchase, development, sale, management and/or operation of special accommodation homes. The Sale Manor Gardens project was said to fall within the terms of the joint venture. The Bufalo parties alleged that Prime Life breached the joint venture agreement, in relation to the Sale Manor Gardens project, by taking control of the third defendant, selling the property for $7m and by threatening to enforce all security documents connected with the loan. They sought an order winding up Sale Manor Gardens, an order setting aside a personal guarantee, rectification of the Sale Manor Gardens shareholders’ agreement and orders restraining Prime Life from enforcing the security documents.
With the breakdown of the relationship, Prime Life served on the Bufalo parties notices to pay pursuant to the loan and security documents. The amount demanded was $1,126,213.67. Had the plaintiff been in a position to sell its shares in Prime Life, it could have readily discharged the obligation. Prime Life refused to withdraw the notices to pay and on 30 August 1999 this proceeding was commenced.
In February 2000 the plaintiff requested Prime Life to release sufficient of its shares owned by the plaintiff to facilitate a sale for the purpose of discharging the loan. The value of the Prime Life shares at that time exceeded the amount payable under the loan. Prime Life refused to release the shares and on 8 March 2000 filed a counterclaim, asserting that the value of its claim was also secured by the debenture.
On 10 August 2000 Prime Life appointed Rathner as receiver and manager of the plaintiff. At that time the plaintiff still owned shares in Prime Life which were worth more than the value of the loan. The plaintiff alleges that, at the time, its assets exceeded its liabilities by approximately $4.2m.
In September 2000 Rathner received legal advice to the effect that the debenture did not secure the counterclaim. The plaintiff submitted that had Rathner accepted and acted on the advice, realising its shares in Prime Life, the loan could have been repaid and the plaintiff discharged from receivership. Leonard Adrian Warren, the solicitor for Prime Life, apparently instructed Rathner not to realise the shares in preference to other assets. A significant element of the case now advanced by the plaintiff is a claim against Rathner alleging breach of his duty as receiver and manager.
The appointment of the receiver and the liquidator, the bankruptcy of the directors and the joinder of the receiver and solicitor as parties marked a shift in the plaintiffs case. The securities had, by that time, been employed by Prime Life. The plaintiff now seeks to challenge the validity of the security instruments and to attribute responsibility and liability for its demise.
The plaintiff alleges that in about November 1998 Prime Life instructed Darrer to prepare loan documents, guarantees and other security documents to record and support the loan to Giovanni Bufalo. The documents included the debenture given by the plaintiff and a mortgage of all of the shares held in the companies owning the Raglan Street property and operating the Manor Gardens business. The plaintiff seeks to set aside the security documents as having been executed in circumstances that constitute unconscionable dealings by Prime Life.
The plaintiff alleges that the documents, prepared by Darrer on the instructions of Prime Life, do not record the agreement between the Bufalo parties and Prime Life. Instead, they record an entirely different and unintended agreement. It alleges that Prime Life did not contribute equity as agreed or permit the property and business to be mortgaged to enable Giovanni Bufalo and the plaintiff to discharge their indebtedness to Prime Life.
Andrews was appointed administrator of Bufalo Corporation on 27 June 2001 and became liquidator by operation of s 446A of the Corporations Law. At that time Prime Life continued to assert a sum secured by the debenture of almost $22m, comprising the initial loan, interest, costs and the counterclaim.
As against Prime Life and Sent, the plaintiff now alleges that Prime Life procured Darrer to act in the interest of Prime Life, while he pretended to act for the plaintiff when preparing the loan and security documents. The plaintiff alleges that Prime Life thereby obtained for itself an unjust advantage. The plaintiff contends that the securities are void or voidable under the general law. Corresponding relief is also sought under the Trade Practices Act 1974.
As against Darrer, the plaintiff alleges that the firm agreed to act on its behalf. It alleges that Darrer breached its duties to the plaintiff by pretending to act for it when in fact taking instructions from Prime Life. Darrer did not reveal the true nature of its retainer by Prime Life and failed to disclose a conflict of interest and duty. The plaintiff alleges causes of action in contract and tort and pursuant to the Fair Trading Act 1999.
As against Rathner, the plaintiff alleges that he was and continues to be a trespasser on its assets and undertakings. He failed to realise assets charged by the mortgage that were available and sufficient to pay out the secured debt. The plaintiff alleges that Rathner did not act in good faith and was reckless in the discharge of his duties.
The allegations in the proposed fourth amended statement of claim are complex and raise a multitude of issues. The primary allegation are of grave misconduct by Prime Life, its solicitors and the receiver. If, as is alleged, Prime Life and the receiver wrongfully prevented the plaintiff from discharging its indebtedness to Prime Life, the plaintiff’s claim for loss and damage may be very substantial.
Application by Prime Life and Sent
All applicants for security invoked the jurisdiction of the Court under rule 62.02(1)(b) of the Rules of Court, s 1335(1) of the Corporations Act 2001 and the inherent jurisdiction of the Court. Prime Life and Sent submitted that at the time of their first application for security the plaintiff did not challenge the jurisdiction of the Court to make an order. The only issue was the amount of security to be given. They submitted that the jurisdictional foundation should be taken to be conceded or self evident from the plaintiffs insolvency.
Prime Life and Sent first made application for security for costs by originating process dated 11 December 2000. The application was heard on 30 July 2004 and on 29 October 2004 orders were made that Bufalo Corporation provide security in the sum of $350,000 for the costs of the first to fourth defendants until the completion of mediation. The time for providing security was extended and eventually a bank guarantee was provided. Mediation was conducted on 26 August 2005, resulting in a conditional settlement. Settlement broke down. There were further attempts at mediation and settlement, although they were unsuccessful. The most recent mediation was conducted in April 2008.
Prime Life and Sent rely upon liberty to apply, granted by the order of the Court on 14 December 2004, to make this application. Their application as formulated is confusing, but appears to seek an increase in the amount of security already provided up to and including mediation and security for costs incurred from mediation to the conclusion of trial. Alternatively, they seek security for costs to the first day of trial. They seek additional security in the sum of $1,681,520.30 made up of the following:
(a)$430,000, as the difference between the sum awarded by the Court in 2004 and the actual cost of the litigation up to the conclusion of the first mediation, on a party/party basis. They calculate that their costs to that point at $780,000;
(b)$73,342.25, as the costs incurred since completion of the first mediation up to the present on a party/party basis;
(c)$562,178, as the costs calculated from the present until trial on a party/party basis; and
(d)$616,000, as the costs of the trial on a party/party basis, on an estimate of 56 days.
Prime Life and Sent rely on the affidavit of Warren, their solicitor. Having deposed to the history of the proceeding, Warren referred to and relied on a report by Ariel Weingart, a costs consultant. The report is constituted by a letter dated 25 November 2008. There was no objection to the letter as evidence although it was criticised by the plaintiff, as was the evidence of Warren, as failing to provide a satisfactory basis for an assessment by the court of the amount of security, if any award is to be made.
The plaintiff’s criticisms of the cost estimates made by Warren and Weingart have substance. The inter-relationship between Warren’s role and that of Weingart is uncertain and in some respects circular. Warren deposed:
The further interlocutory steps set out in Mr Weingart’s report have been detailed by him after extensive consultation with me as to the likely extent and nature of those interlocutory matters, and to the extent that its content reflects those discussions, I agree with the same, save that since my consultation with Mr Weingart I have formed the view that the number of witnesses is likely to be greater, as set out in more detail below.
Warren estimated the likely length of trial at 56 to 81 days. Weingart said in his letter to Warren:
I confirm having discussed this matter with you and examined part of your file.
What is arresting about the estimates of the cost of preparation and trial, is their magnitude. Warren deposed that actual costs incurred for the period for which security was previously ordered until 29 July 2005, together with disbursements, were approximately $2,253,800. That sum included costs of a related matter. Warren calculated the top-up claim as a percentage of that sum after making an allowance for the related proceeding.
Some of the items in Weingart’s letter deserve special mention. The costs estimated to trial, in the sum of $562,178, include instructions for brief in the sum of $236,645. This sum includes an allowance of $145,000 for three experts. There is no explanation as to why three experts are required and if they are, what if any overlap might exist with the experts required by other defendants.
An allowance of $35,000 has been made for the preparation of points of contention of fact and law. The sum of $170,808 is allowed for the preparation of briefs to counsel with 17 days of preparation in the case of senior counsel and 20 days in the case of junior counsel. The cost of pre-trial consultations were estimated at $72,476.
The evidence of Warren and the letter from Weingart are inadequate in their explanation of and justification for the very substantial and costly work said to be required to prepare this case for trial. Their calculation of charges and disbursements lacks any utility because it is predicated on an unsubstantiated assessment of the work required. The assessment appears manifestly excessive. It is impossible to discern the significance of the counterclaim to the calculation. What expert testimony is required? What are the real issues in dispute? The case has been allowed to drift on without the high level of judicial management it requires. That is about to change.
Application by Darrer
Darrer made application by summons dated 6 November 2008. The firm applied for the costs of preparation for trial and for trial, although the application for the costs of the trial is not pressed at this time. No application is made in respect of past costs. Some security was provided by the plaintiff in 2004 without the need for an application to the Court, up to and including mediation.
The solicitor for Darrer, Raffaela Pisano, deposed that the firm had already incurred party/party costs in the proceeding far exceeding the amount of security already provided by the plaintiff. Darrer relied on an affidavit of John David White, a costs consultant, to quantify its claim for security. White deposed that he had conferred with Pisano and took instructions as to the likely future course of the proceeding. Pisano did not herself depose to such details. White deposed that discovery was not yet complete, with further discovery to be provided by other defendants. He anticipated that issues of legal professional privilege would arise in connection with inspection. Darrer proposes to engage the services of a number of experts in relation to matters of valuation, realisation strategies and other matters.
Pisano and White estimated that 13 lay witnesses would give evidence, together with a number of experts. Work in preparation for trial was said to include a review of transcripts from public examinations, as well as discovered documents. Pisano proposed that senior and junior counsel should be allowed 10 days preparation; four days required for conferences with witnesses and six days required for settling witness statements. Pisano or White estimated the likely duration of trial at 31 to 35 days. In his letter of advice, White estimated the total cost and disbursements to the commencement of trial at $292,270.
Many of the items comprising Darrer’s claim for security up to the commencement of trial are challenged by the plaintiff. Jones, the plaintiff’s solicitor, set out in his affidavit, sworn 1 December 2008, the grounds for each complaint. There is substance to some of the complaints. Allowance of over $25,000 was made for future directions hearings and interlocutory applications. The amount of $44,000 was claimed for an item described as reasonable and necessary attendances and correspondence. This item seems to incorporate the bulk of the solicitor’s work in preparation for trial. The plaintiff submitted that only $11,000 should be allowed for that work. While it is true that a considerable amount of work will be required by Darrer’s solicitors in preparation for trial, there is reason to believe that much of the work described in that item may never be undertaken.
The next item of importance is a claim of $26,400 for statements of evidence. That claim proceeds on the basis that witness statements will be required, when, if current practice is adopted, they may not. Some allowance might, of course, be properly made for conferences and the preparation of the statements outlining the evidence each witness proposes to give. This item seems to overlap with other components of trial preparation.
The sum of $58,353, claimed for the preparation of briefs to counsel, seems excessive. While the claim against Darrer is significant, the issues arising out of the plaintiff’s allegation appear to be limited to the role of a solicitor in the preparation of documents, causation and the quantification of the claim for damages. The calculations made by Pisano and White appear reasonable for the work described, but lack utility for the same reasons as do the calculations made by Weingart.
Application by Rathner
The application by Rathner suffers from the same defect. It is made by summons dated 7 November 2008. Rathner also seeks security for his costs of the whole of the anticipated trial, estimated at 31 days, although the application for the costs of the trial is not pressed at this time. The claim is particularised in a letter dated 21 November 2008 from Mahlab Costing Pty Ltd which calculated future party/party costs at $595,588.60.
Rathner has not made a prior application for security for costs. It was unnecessary because the plaintiff agreed to provide security in the sum of $42,500, by way of bank guarantee, in 2004. No claim is made for past costs.
Rathner’s solicitor, Penelope Pengilley, deposed to the anticipated pre-trial interlocutory steps and the amount of time expected to be taken for each step as a basis for calculating the likely costs. I have no doubt that her assessment and the resulting calculations are honestly made and advanced, but they lack utility. The scope of the case is so uncertain and ill-defined as to make any proper assessment, for the purpose of an order for security, impossible.
An estimate was made for trial preparation, estimated at between 20 and 25 days for junior counsel and for senior counsel, 15 to 20 days. Judith Rosley Headstrom, managing director of Mahlab Costing, provided independent expert evidence in relation to the following matters:
(a)An estimate of costs going forward from mediation to close of trial;
(b)An estimate of costs to date; and
(c)Whether the previous security for costs assessment was accurate.
The total costs up to but not including trial was estimated by Ms Headstrom at $320,000. This sum included an allowance for trial preparation by senior counsel in the sum of $95,445, for junior counsel in the sum of $65,440, and for solicitors in the sum of $27,102. The amount also includes an allowance of $41,000 for expert fees and almost $50,000 for the preparation of witnesses and witness statements.
The plaintiff makes similar criticisms of Rathner’s claim as were made of the assessments undertaken on behalf of the other defendants. The plaintiff’s assessment of the likely pre-trial costs to be incurred by Rathner, is $50,500. It is unsubstantiated and suffers from the same limitations as the defendants’ estimates.
Issues are not yet defined. Witness statements may not be ordered in this case. There is a very real prospect that the proposed experts will substantially overlap with those to be called by the other defendants. Estimates for preparation by counsel seem excessive, having regard to the relatively narrow compass of the case against Rathner. He is not concerned with the Prime Life counterclaim.
Plaintiff’s response
The plaintiff responded to the applications by proffering undertakings by the liquidator, supported by an indemnity from its litigation funder. Litigation Lending Services Number 3 Partnership entered into an agreement with the liquidator (described in the agreement as the “Insolvency Practitioner”), the plaintiff and its solicitors. Relevant for present purposes is the indemnity provided to the liquidator in respect of any “Order for Costs”, which is defined to mean:
Any costs payable by the Insolvency Practitioner or the Company by virtue of any order made against the Insolvency Practitioner or the Company for the payment of costs in the Proceedings relating to any step occurring in the Proceedings after the date of this agreement and prior to the termination or conclusion of this agreement. The amount of such costs shall be any amount agreed by the Insolvency Practitioner (with the consent of LLS) with the party entitled to such costs, or any amount awarded by the court on a taxation of the relevant order for costs, whichever is applicable.
The indemnity, provided in clause 5, states:
5.1LLS hereby indemnifies the Insolvency Practitioner from and against any Order for Costs against the Insolvency Practitioner made in the proceedings in respect of the period from the date of this Agreement up to the date of termination or conclusion of this Agreement.
5.2At the request of this Insolvency Practitioner, LLS will provide such bank guarantee or bank guarantees as the Insolvency Practitioner requires to support the indemnity set out in 5.1 above.
The agreement continues to operate until the proceeding is finalised or terminated, although LLS may terminate the agreement by written notice at any time.
By a deed of acknowledgement dated 13 November 2008 the indemnity given by LLS was extended to provide:
The parties hereto agree, and LLS expressly acknowledges, that the indemnity provided by LLS to the Insolvency Practitioner in Clause 5.1 of the Funding Agreement extends to indemnify both the Insolvency Practitioner and the Company from and against any Order for Costs against the Company or the Insolvency Practitioner made in the Proceedings in respect of the period from the date of the Funding Agreement up to the date of termination or conclusion of that agreement.
The undertakings proffered by the liquidator on his own behalf and on behalf of the plaintiff were in the following terms:
1.… he will pursue, on his own behalf and on behalf of the plaintiff, the indemnity contained in the funding agreement for the benefit of each (the defendants) in circumstances where he or the plaintiff suffers an adverse costs order in this proceeding;
2.… to assign or to hold on trust for each of (the defendants) the benefit of the indemnity contained in the funding agreement and the proceeds of it in respect of any adverse costs order as referred to in the preceding paragraph; and
3.… to inform each of (the defendants) immediately in the event:
(a)LLS terminates or threatens to terminate the funding agreement or the deed of acknowledgment (including any intention or threat by LLS to do so communicated by our client);
(b)he terminates or intends to terminate the funding agreement or the deed of acknowledgment; and
(c)any variation is agreed or there is any proposal put to him to vary the funding agreement or the deed of acknowledgement so as to amend or alter the affect of the indemnity provided by LLS to his and the plaintiff’s benefit.
The plaintiff submitted that the combination of the litigation funding agreement, the extended indemnity and the undertakings contributed to the plaintiff a new and valuable asset which deprived the defendants of the jurisdictional foundation for their applications. The plaintiff submitted that unless the defendants prove that the asset was valueless they would not discharge their onus to establish that there was reason to believe that the plaintiff would be unable to pay the defendants’ costs if successful. A dispute arose as to who was required to adduce evidence of the financial position of the litigation funder.
The plaintiff relied upon Livingspring Pty Ltd v Kliger Partners[1] to argue that the onus does not shift from the applicant for security, who is required to establish, as a threshold condition for the exercise of the power to grant security, that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful. The jurisdictional condition must be satisfied before the discretion is enlivened. The plaintiff submitted that it was for the defendants to establish that the value of the indemnity and undertakings was inadequate to meet any order for costs.
[1][2008] VSCA 93; 66 ACSR 455.
While emphasising that, from beginning to end, the onus rests upon the applicant for security to persuade the Court that an order for security should be made, the Court in Livingspring recognised that there may be particular discretionary matters about which the opposite party must necessarily bear an evidentiary burden. The Court said:
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 Wholesale Co Ltd v Gates Export Corp:
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.
The same would be true of a contention that the plaintiff’s impecuniosity was caused by the defendant.[2]
[2]Ibid, [22].
This passage does no more than reflect a common sense approach to the distinction between an evidentiary and ultimate burden of proof. Where a plaintiff asserts a fact circumstance which, if established, might disqualify the defendant from relief (because, for example, the jurisdictional foundation is not established) the party making the assertion must establish that fact. Failure to do so may mean that the party required to satisfy the ultimate burden may do so without the need to disprove the asserted position.
The defendants adduced evidence that Litigation Lending Services Number 3 Partnership is a business carried on by Litigation Lending Management Pty Ltd. Only four $1 shares in that company have been issued and allotted. By letter dated 18 November 2008 the solicitors for Rathner wrote to the plaintiff’s solicitors requesting information concerning the worth or financial circumstances of the partnership. No such information was or has since been provided.
The plaintiff submitted that the defendants’ evidence did not go far enough and accordingly, they had failed to discharge the onus of establishing the jurisdictional condition. The plaintiff did not submit that in the absence of the new asset (the indemnity and undertakings) their financial condition was such as to satisfy the jurisdictional condition.
In Transocean Capital Pty Ltd v AFSIG Pty Ltd[3] an application was made by the defendants for security for their costs. They relied upon ASIC searches to demonstrate that the plaintiff was newly formed and had issued capital of $30. The plaintiff sued as a trustee. Barrett J said:
[3][2006] NSWSC 806.
The plaintiff has not placed before the court any evidence of its financial position or of any express right of indemnity it enjoys as trustee. It has been content to meet the security for costs application on the ground mapped out by the defendants. It says, quite simply, that the evidence about a paid up share capital of $30.00 and the plaintiff’s trustee status “establishes nothing” and that the idea that the plaintiff does not have the capacity to meet an adverse costs order flies in the face of the very subject matter of the proceedings — in essence, that the defendants solicited the plaintiff as an investor of $2 million in their project.
I refer, in this connection, to observations of Smithers J in Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40-584. His Honour said (at p 46,729):
Where the only tangible assets of an applicant company are held in trust for another entity and its solvency depends on its right as trustee to indemnity against that entity it is necessary for the court to have in mind the difficulties which a successful respondent would face in attempting to execute in respect of an order for costs. Indeed, unless some step is taken to alleviate those difficulties it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability.
Smithers J also said (at p 46,731):
I have concluded that an applicant being a trustee company which desires to resist an order for security for costs should establish that recourse to property held by or for it will be available to the party against whom it has brought its action and be adequate, at the appropriate time, to meet the possible liability for costs.
This approach was accepted and adopted by Tadgell and Cummins JJ in Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd[1995] 1 VR 150. In that case there was evidence that the party against which security was sought in the Court of Appeal (a defendant) was a trustee and that it held, as trustee, substantial real estate assets, some of which were unencumbered. The company’s paid up capital was $3.00. In ordering security for costs, Tadgell and Cummins JJ said:
It was contended for the defendants that in order for security for costs of the appeal should be refused because [sic] holds unencumbered real estate the value of which exceeds the likely cost of the appeal and over which it has a right of recourse as trustee by way of indemnity. These facts, however, by themselves seem scarcely to meet the plaintiff's contention. The solicitors for the plaintiff have sought to inspect the trust deed under which Lagarna is constituted trustee but it has not been produced to them and it was not in evidence before us. For all that appears the trustee may, and I am prepared to assume that it would, be required at any time to transfer its legal interest in the unencumbered property to the beneficiaries of the trust or to encumber it.
Also instructive is the judgment of Goldberg J in Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486. I quote from para [18] of the judgment:
The evidence discloses that each applicant has a paid up capital of $2. It is not disputed that each applicant is a trustee company so that it has no other assets. On this ground alone I consider that there is credible testimony that there is reason to believe that the applicants will be unable to pay the respondents' costs if the respondents are successful. Assuming that the applicants have a right of indemnity out of the relevant trust funds which they administer is it necessary to consider what is the position of those trust funds.
Goldberg J went on to refer to the evidence about the trust assets and their substance.
In the present case, the defendants have shown the two matters to which I have referred: first, that the plaintiff has a paid up capital of $30.00 only; and, second, that it is a trustee. In the absence of countervailing evidence, those matters alone must be taken to represent “credible testimony” of the plaintiff’s likely inability to pay the defendants’ costs if the defendants are successful. The plaintiff has not sought to adduce evidence of the relevant trust instrument and its provisions as to indemnity. Nor has the plaintiff sought to show the extent of the trust assets that may be available in support of any indemnity. It has been content merely to observe that the defendants were willing to regard it as a good source of the $2 million they required for investment purposes. But, of course, there is a great difference between the plaintiff’s own ability to obtain funds if and when it needs them for deployment in its business and the ability of a creditor of the plaintiff to force the plaintiff to obtain and disgorge funds when the creditor seeks to enforce a right to be paid.
I am satisfied that the defendants have shown reason to believe that the plaintiff will be unable to pay the costs of the defendants if they are successful in their defence. I therefore turn to the discretionary question whether security should be ordered.
In my opinion the plaintiff, having sought to rely upon the “new asset” to defeat the jurisdictional condition, bore an evidentiary burden to establish that the indemnity had relevant value. There is evidence of a partnership, but no evidence of its members, its assets or its worth. In the absence of some information concerning the composition of the partnership, the financial position of its members, the extent of their liability as partners and the role and worth of a company operating the business, it is not possible to attribute any tangible value to the indemnity.
While the applicant for security bears the onus of proof from beginning to end, the evidentiary burden to establish the jurisdictional condition may be satisfied without requiring the applicant for security to prove that the new asset, asserted by the plaintiff to be valuable, is worthless.
In the absence of evidence concerning the financial position of the partnership I am not prepared to treat the indemnity and undertakings as an asset of any relevant value. It is for the plaintiff to provide evidence, if it is available, to establish the value of the new asset upon which it relies to resist these applications.
On the basis of the evidence at this time, I am satisfied that the defendants have discharged the onus to show that there is reason to believe that the plaintiff will be unable to pay their costs if successful. That position may, of course, change should any further application be made. I turn to the discretionary question as to whether security should be ordered in all of the circumstances.
Discretionary considerations
Once the jurisdictional condition for a grant of security has been satisfied, the discretion to order security is unfettered although it is to be exercised judicially. It is not to be exercised with any predisposition one way or the other. It is open ended and not fettered by rigid guidelines.[4]
[4]Ariss v Express Interiors Pty Ltd (1996) 2 VR 507, 514; Epping Plaza Fresh Fruit and Vegetables Pty Ltd v Bevendale Pty Ltd (1999) 2 VR 191, 195
In Ariss v Express Interiors Pty Ltd[5] Phillips JA said:
In my opinion, it is worth recalling more fully what was said by Megarry VC in Pearson v Naydler [1977] 1 WLR 899 because it identifies the issues commonly underlying an application for security for costs under the statute and affords useful guidance to their proper resolution. His Lordship said at 906-7:
It seems plain enough that the inability of the plaintiff company to pay the defendant's' costs is a matter which not only opens the jurisdiction but also provides a substantial factor in the decision whether to exercise it. It is inherent in the whole concept of the section that the court is to have power to order the company to do what it is likely to find difficult in doing, namely, to provide security for the costs which ex hypothesi it is likely to be unable to pay. At the same time, the court must not allow the section to be used as an instrument of oppression, as by shutting out a small company from making a genuine claim against a large company. For this reason, Mars-Jones J was not prepared in the Parkinson case to make an order for security for costs for more than the 1500 pounds that the master had ordered: see [1973] QB 609, 617. As against that, the court must not show such a reluctance to order security for costs that this becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on a more prosperous company.
Litigation in which the defendant will be seriously out-of-pocket even if the action fails is not to be encouraged. While I fully accept that there is no burden of proof one way or the other, I think that the court ought not to be unduly reluctant to exercise its power to order security for costs in cases that fall squarely within the section.
[5](1996) 2 VR 507.
Particular matters relevant to the exercise of discretion in this case include the following:
(a)The nature of the proceeding. Was it defensive? Were the applicants for security responsible for the plaintiff’s impecuniosity? What is the significance of the counterclaim?
(b) The existence of the litigation funder, the indemnity and undertakings.
(c) The amount of and justification for the defendants’ claims for security.
(d) The course of mediation and settlement prospects.
The nature of the proceeding
It is not appropriate or even possible, on an application such as this, to form any view of the merits of the claim as a matter relevant to discretionary considerations on an application for security.[6] Background facts may, however, be relevant. Moreover, some analysis of the background facts and litigation history is inherent in a consideration of whether the plaintiff’s case was defensive and whether its impecuniosity was caused by the applicants for security
[6]Epping Plaza Fresh Fruit and Vegetables Pty Ltd v Bevendale Pty Ltd (1999) 2 VR 191 at 199; [1999] VSCA 43 at [28].
The background and role of the counterclaim is also relevant to the exercise of discretion. At various times Prime Life estimated its claim as exceeding $20m. The plaintiff contends that the counterclaim is maintained as an ex post facto justification for the refusal by Prime Life and its receiver, Rathner, to realise the plaintiff’s shares in Prime Life and permit it to discharge its liability. Prime Life had, at least for a significant period of time, asserted that the debenture over the assets of the plaintiff secured its counterclaim.
The counterclaim is not presently particularised and, if litigated, calls for a determination, on a project by project basis, of claims for loss and damage resulting from alleged breaches by the plaintiff under various project agreements. Litigation of the counterclaim must, therefore, occupy a significant portion of the time estimated by Prime Life and Sent for the trial and account for a very significant part of their estimated costs of preparation.
No attempt has been made to analyse the impact of the counterclaim and no allowance has been made for the costs that may be attributable to it. The silence of Prime Life concerning the impact of the counterclaim on the trial, preparation and thus their cost burden and the fact that it remains unparticularised further undermine the reliability of the cost estimates given by Prime Life and Sent.
In my opinion the position of the plaintiff’s case is defensive in nature. Prime Life and Sent sought to characterise the plaintiff’s case as little more than a conventional commercial dispute arising out of the break-down of joint venture relationships between the Bufalo parties and Prime Life. I take a different view. The commencement of the proceeding, on 2 September 1999, followed the refusal by Prime Life to withdraw its notice to repay the advance to Gionanni Bufalo.
Prime Life may be fully entitled to rely on its securities, which may be found to be valid and enforceable. Darrer and Rathner may be exonerated of any wrongdoing. Never the less, the actions of Prime Life and Rathner effectively disabled the plaintiff from repaying the debt. This is a case where the impecuniosity of the plaintiff may be said to have been caused by at least some of the applicants for security.
Litigation funding
The plaintiff relies upon the litigation funding agreement, the indemnity and the undertaking in a number of ways. First the plaintiff submitted that by reason of the funding agreement, the plaintiff has a relevant asset namely, the right of indemnity. The plaintiff also relied on the decision in Australian Derivatives Exchange Ltd v Doubell[7] in which the Supreme Court of New South Wales accepted a funding agreement, coupled with undertakings as an adequate substitute for some other form of security in a proceeding under s 588M(2) of the Corporations Act.
[7][2008] NSWSC 1174.
The Doubell proceeding was brought by the liquidator, not the company in liquidation, even though the title would indicate that the proceeding is one brought by the company. As such the Court commenced its analysis from the position that the plaintiff was a natural person who would not normally be subject to an order to give security. There was also a litigation funder. The defendant argued that because there was a party providing financial assistance who would benefit from a successful outcome, security should be ordered even though it might not otherwise have been ordered. The Court undertook a useful analysis of the relevance of the litigation funder in the exercise of discretion to award security. Consideration was given to the risks associated with the possible termination of the funding agreement and the practical matters that might arise should a costs order be made and the funder be unwilling to pay costs. As Hodgson JA said in Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd,[8] an unwilling funder may lead to litigation in order to enforce the indemnity which would be cumbersome and could well be highly contentious.
[8]{2008] NSWCA 148 at [52].
Prime Life and Sent echo this expression of concern, pointing to various possibilities under which an order for costs might be thwarted or prove unreasonably cumbersome to enforce. There is substance to their concerns. Notwithstanding the undertakings given by the liquidator, a litigation funder may terminate the agreement in anticipation of an adverse “Order for Costs”. Another possible risk is that a dispute may arise between the litigation funder and the liquidator concerning the due performance by the liquidator of his obligations under the funding agreement.
In my opinion, indemnity and undertakings proposed by the plaintiff, in the absence of supporting information about the financial position of the litigation funder, does not provide an adequate measure of security to ensure that a lack of success by the plaintiff does not visit injustice upon the defendants. In the absence of such information, the right which the liquidator presently has to call for a bank guarantee is a far more direct, and in my view preferable, means of employing the indemnity given by the litigation funder. It also avoids the uncertainties identified by the defendants.
The claims for security
I am not satisfied that the work and cost estimates made by any of the defendants are reasonable and ought to be accepted. They are more in the nature of ambit claims. I have no confidence in the amount of work required for trial preparation. Underlying assumptions about the number of interlocutory applications, the nature and scope of any discovery disputes, the nature and scope of expert assistance, the work required to prepare briefs to council and for preparation for trial, more closely resemble speculation than informed assessments. The estimates are without a credible foundation. The issues are not properly defined. Trial estimates vary wildly. The impact of the counterclaim has been ignored.
I am astonished at the costs that are said to have been incurred by Prime Life and Sent and their estimate of the likely duration of trial. I am concerned by the discrepancy between trial estimates. I am also concerned about the failure on the part of Prime Life to address its counterclaim, except to submit that I should disregard it. In my view the counterclaim requires close analysis and should not be treated as a conventional counterclaim which might ordinarily add little to the costs of the main proceeding or be treated as part of the defence.
If I am to make a proper assessment of the work required to prepare this case for trial and arrive at some basis upon which to consider applications for security, I will require more information from the parties concerning discovery disputes (if any), issues for trial, witnesses, experts and the presentation of evidence, before a proper assessment can be made.
Mediation and the prospect of settlement
This proceeding has been subject to numerous mediations. Agreement had been reached although settlement failed because a condition was not satisfied. Agreement having been reached in the past, the plaintiff submits that there is a real likelihood that a commercial settlement can be achieved in the future. The defendants submit that the opportunity for a negotiated resolution has been exhausted and trial is inevitable.
Given the costs already incurred in this proceeding and the fact that mediation has been shown to achieve some measure of success, if only conditional, I would encourage the parties to continue in their efforts to achieve a commercial resolution. An order for security for costs up to and including the first day of trial may have the effect of discouraging a pre-trial resolution whether by formal mediation or informal negotiations. A satisfactory point must, however, be identified to define the scope of any security to be ordered.
Discretion - conclusion
I do not accept that the plaintiff should be required at this time to give security for the amounts claimed for trial preparation, or indeed anything approaching that sum. The material presently before the court does not permit a proper assessment to be made.
There are serious discretionary considerations which militate against the grant of any further security. In my view the claim is properly characterised as defensive. The evidence points to the applicants for security as the cause of the plaintiff’s impecuniosity. The claims for security are in the nature of ambit claims without sufficient justification.
The existence of the litigation funder is, however, an important discretionary consideration which, in my view, favours an order for security. Its presence diminishes the risk that an order for security will stultify the action. The weight given to other discretionary considerations, such as the cause of the plaintiff’s impecuniosity may, to some extent, be neutralised by its participation. It stands to profit from a successful outcome.
Very substantial security has already been given by the plaintiff. I am not satisfied with the cost estimates, primarily because I am not satisfied with the assessment of the work required to prepare for trial. In the circumstance I have decided to order very limited additional security in favour of each applicant until such time as I am satisfied that the work and costs have a reliable foundation.
All parties agree that discovery is incomplete. Pleadings are closed except for particulars of counterclaim. These must be provided as soon as possible if Prime Life is to prosecute the counterclaim. If it proposes to do so it must, at the next directions hearing, be in a position to explain the impact of the counterclaim on the duration of any trial. If it proposes to make any further application for security, it must explain the cost consequences of the counterclaim.
Before this matter is fixed for trial the parties must identify all witnesses and make submissions on the way evidence should be prepared and adduced. The parties must identify the topics of expert evidence and their experts. Directions will be made as to how expert evidence will be prepared and adduced, with the object of reducing the time and cost of preparation and the time required for giving the evidence. The parties must consult on the issues of trial, its duration, and endeavour to present a joint position to the court. This proceeding will be closely managed.
The amount of security
In Saint-Gobain RF Pty Ltd v Maxx Spa Corporation Pty Ltd[9] Habersberger J was confronted by evidence of a costs consultants in similar form to that presented by the defendants. In that case, his Honour had no evidence to justify the reasonableness of the time estimates apart from assertions. I am confronted by a similar inadequacy in the material and consequently, I am unable to accept the costs estimates as reasonable for the purpose of an order for security for costs. There are reasons, expressed above, as to why I regard each of the estimates unreliable. I do not accept the estimates made by the plaintiff, which also seem arbitrary.
[9][2004] VSC 335.
If any party should hereafter seek additional security for costs of preparation for trial, any such application should be communicated to the plaintiff prior to the hearing at which the proceeding is set down for trial. It is only after discovery is complete, witnesses identified, issues defined, directions made for expert and lay evidence and reliable estimates given of the likely duration of the trial, that the court will be in a position to make an assessment of the likely costs to be incurred in preparing for trial. The parties should not assume that any further application for security will be automatically granted. Much will depend on the evidence, if any, adduced by the plaintiff concerning the financial position of the litigation funder. The jurisdictional foundation must be satisfied and the discretion properly exercised.
I reject the applications by Prime Life and Sent for top-up security. The evidence in support of that claim was unsatisfactory. In my opinion any such application should have been made as soon as it became apparent that the security given was inadequate. To put a plaintiff on notice, that an application for additional security may be made, is not sufficient to excuse the unusually lengthy delay that occurred in this case. A plaintiff is entitled to have any application brought promptly and its liability for security established before it incurs further costs.
I must approach the task of assessing the amount or amounts of security in light of the evidence before me and the feel of the case, in order to achieve the objective of an order for security. The evidence before me is of some assistance to identify probable costs in relation to discovery and directions hearings.
Although I am uncertain about the amount of work required to complete discovery, the defendants’ material provides some assistance. Prime Life is to provide further discovery. It has estimated its costs associated with further discovery at $2310.50. Darrer has estimated its additional discovery costs at $2760, and Rathner has estimated his at $6054.60. There is some speculation about possible discovery disputes. I am not prepared to make allowance for speculation. Once discovery has been completed the matter can be re-listed for directions. If there are disputes concerning discovery they can be raised at that time and steps taken to resolve them.
Prime Life and Sent claimed $5708 for two directions hearings. I propose to allow only one at this stage. I will allow $3000. Rathner claims a little over $4280 for each directions hearing and Darrer, $4025 for each hearing. I will allow each applicant the same amount of $3000 for one directions hearing.
I will allow each applicant $2000 to complete discovery. I will make a further allowance of $3000 to reflect the work to be done to meet the expectation of the court for detailed submissions and estimates required before the proceeding is set down for trial.
Accordingly, I propose to order that the plaintiff give further security to each of the three applicants, Prime Life and Sent, Darrer and Rathner, in the sum of $8,000 until orders for trial are made at which time a trial date will be fixed.
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