Coonwarra Pty Ltd v Cornonero Pty Ltd & Ors
[2018] VSC 333
•20 June 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
GENERAL LIST
S ECI 2017 00190
| COONWARRA PTY LTD (ACN 063 839 832) | Plaintiff |
| v | |
| CORNONERO PTY LTD (ACN 606 176 069) AND OTHERS (according to the attached schedule) | Defendants |
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JUDGE: | DERHAM AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 17 April 2018 |
DATE OF JUDGMENT: | 20 June 2018 |
CASE MAY BE CITED AS: | Coonwarra Pty Ltd v Cornonero Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2018] VSC 333 |
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PRACTICE AND PROCEDURE – Security for costs – Whether plaintiff’s impecuniosity caused by defendant – 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 Plaintiff | Mr A T Schlicht with Mr M D Tehan | Simon Nixon & Associates |
| No appearance for the First Defendant | Maddocks | |
| For the Third Defendant | Ms V Blidman | Dentons |
| No appearance for the Fourth Defendant | Portfolio Law Pty Ltd |
TABLE OF CONTENTS
Introduction......................................................................................................................................... 1
Summary of conclusions................................................................................................................... 1
Plaintiff’s submissions...................................................................................................................... 2
The facts and claims........................................................................................................................... 3
Defendants submissions................................................................................................................. 14
Consideration.................................................................................................................................... 17
Quantum of security........................................................................................................................ 19
Discount........................................................................................................................................ 22
Conclusion......................................................................................................................................... 25
HIS HONOUR:
Introduction
The third defendant (Breckenridge) has applied under Order 62 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (Rules) and s 1335(1) of the Corporations Act 2001 (Cth) (the Act) for an order that the plaintiff give security for costs of defending the proceeding. The application is made pursuant to a summons supported by the affidavits of Breckenridge’s solicitor, Mr Benjamin Allen.[1]
[1]The summons is dated 23 February 2018. The affidavits are sworn 23 February 2018 (first Allen affidavit) and 29 March 2018 (second Allen affidavit).
The application is opposed by the plaintiff. That opposition is supported by the affidavits of the plaintiff’s director, Mr Martin van der Bergt[2] and the plaintiff’s solicitor, Mr Simon Nixon.[3]
[2]Affidavit made 6 March 2018 (van der Bergt affidavit).
[3]Affidavits made 9 March 2018 (first Nixon affidavit) and 22 March 2018 (second Nixon affidavit).
The applicable law is well settled by a variety of decisions of this Court and many other Courts.[4] It is unnecessary to rehearse the principles.
[4]See for example, my decisions in Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311; Cox v Cox & ors [2013] VSC 318; US Realty Investments LLC #1 & Ors v Need [2013] VSC 590; Opes Prime Group Ltd & Anor v Niako Investments Pty Ltd & Anor [2014] VSC 414; Imam Ali Islamic Centre v Imam Ali Islamic Centre Inc [2015] VSC 692; vonMarburg v Aldred & Anor (No 3) [2017] VSC 146; and ACN 096 450 770 (formerly AJH Lawyers Pty Ltd) v Mathieson Nominees & Anor [2017] VSC 559.
Summary of conclusions
It emerged early in the application that there was no dispute that there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of Breckenridge if ordered to do so, so that the threshold condition for the exercise of the power is satisfied.
It also became clear that the principal basis on which the plaintiff resists the making of an order is that the plaintiff’s present impecuniosity has been caused or contributed to by the conduct of Breckenridge in relation to the transactions the subject of the claim. The plaintiff had, in its written outline of submissions, also raised as a basis to resist the order for security that the making of an order would unduly stultify the ability of the plaintiff to pursue an arguable case legitimately instituted. This was abandoned at the outset of argument as the plaintiff offered no evidence of the means of those who stand behind the plaintiff.[5]
[5]See Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1, 4; Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 [22] (Livingspring); Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 [66]; Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564, 582–3 [76]; Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Ltd (2007) 65 ACSR 383, 396 [51].
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.[6] It is a factor often raised in conjunction with another factor, that an order for security may stultify the litigation or be otherwise oppressive.[7]
[6]Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311 [20(b)].
[7]Australian Quarry Holdings Pty Ltd (in liq) v Dougherty & Ors (1992) 8 ACSR 569, 570.
After examining the plaintiff’s evidence submitted to oppose an order for security, and its pleadings, it is not possible at this stage to conclude that the plaintiff’s present impecuniosity has been caused or contributed to by the conduct of Breckenridge. It is also not possible to conclude that the plaintiff’s impecuniosity may have been so caused.
I have assessed the appropriate sum for Breckenridge’s security for costs up to the mediation of the proceeding at $70,500.
Plaintiff’s submissions
The plaintiff conceded, as I have said, that the jurisdiction of the Court was enlivened, and that it was presently without any sufficient financial resources to pay Breckenridge’s costs if he is successful in resisting the claims against him. It is therefore convenient to begin with the plaintiff’s submissions on whether the plaintiff’s impecuniosity has been caused or contributed to by the conduct of Breckenridge. This does not affect the ultimate burden, which rests on Breckenridge, from first to last.
The plaintiff contends that on the basis of the facts as set out in Martin van der Bergt’s affidavit, and pleaded in the Further Amended Statement of Claim (FASOC), the conduct of Breckenridge (amongst others) has caused the plaintiff to lose its only asset valued in 2016 at $8,000,000.00. Thus, the impecuniosity of the plaintiff has been brought about by the actions of Breckenridge.
The plaintiff also submitted that it is unnecessary to set out in painstaking detail the claims made by the plaintiff in the proceeding.[8] As the hearing of argument demonstrated, however, it is necessary to identify in some detail the facts and allegations as presently known. Only in that way can it be seen whether the plaintiff’s contention is properly based.
[8]Plaintiff’s Outline of Submissions, 6 April 2018 [15] (Plaintiff’s Outline of Submissions)
The facts and claims
The facts and claims set out in the following paragraphs are based on the FASOC and the van der Bergt affidavit, supplemented by the second Allen affidavit sworn on behalf of Breckenridge. I note that many of the facts alleged in the FASOC are disputed by Breckenridge, or attacked as conclusions from facts which are not stated or identified, and a number of aspects of the FASOC are criticised as not clear, not properly based or legally impossible.[9]
[9]Some of these criticisms have since been raised by the first defendant in an application to strike out the FASOC.
I also note that at the time of the hearing Breckenridge had not filed any defence. There had been criticisms of the plaintiff’s pleading and requests for particulars that held up the filing of a defence. Since this judgment was reserved, Breckenridge has filed a defence. The defence accords generally with the affidavit of his solicitor, and the submissions of his Counsel, which outlined his defences and further criticisms of the plaintiff’s pleading.
The plaintiff was the registered proprietor of a very valuable block of land at 1435 Plenty Road, Mernda (Mernda Property). A market valuation of the Mernda Property assessed its value in 2016 at $8,000,000.00.[10] A mortgage to the Commonwealth Bank of Australia existed in 2010, but was discharged in 2011 and the Mernda Property remained unencumbered until the events the subject of the claim, which the plaintiff seeks to contend brought about its current impecunious financial position.
[10]Van der Bergt affidavit [33], exhibit MVB-14.
Mr Martin van der Bergt was the sole director of the plaintiff. He was contacted by Breckenridge in about 2010 to discuss the potential development of the Mernda Property as a shopping centre complex.[11] Breckenridge represented to Martin van der Bergt that he and the fourth defendant (Ascenzo) were experienced in construction and development.[12] After these discussions, in December 2011, the plaintiff agreed to enter into a lease of the Mernda Property for a term of 30 years to a company associated with Ascenzo.[13] The entry into the lease was subject to conditions precedent which involved the tenant obtaining all relevant planning permits and approvals to develop the land, which was anticipated to be within three years of the date of the lease on 15 December 2011.
[11]Van der Bergt affidavit [7].
[12]Van der Bergt affidavit [7].
[13]Van der Bergt affidavit [8]. The Agreement for Lease is exhibit MVB-3 and is for a term of 30 years.
There were continuing discussions about the development of the Mernda Property until mid-2013, when there was about 6 months left under the agreement for lease for satisfaction of the conditions precedent. Breckenridge and Ascenzo suggested a change in approach that involved the plaintiff abandoning the lease and entering into a development agreement in respect of the Mernda Property. Breckenridge and Ascenzo advised that it would be difficult to sell the concept of only a leasehold of the land to a tenant who would then be required to fund all construction costs. They also told the plaintiff that the typical target market was superannuation funds who would wish to acquire the freehold.[14] Ascenzo and Breckenridge proposed subdividing the Mernda Property into two lots and selling the lot fronting Plenty Road (Lot A), whilst retaining the lot at the rear (Lot B) for future development as a joint venture between the plaintiff and Trimont Pty Ltd (Trimont).[15]
[14]Van der Bergt affidavit [9]–[10].
[15]Van der Bergt affidavit [10]-[11].
The plaintiff agreed to this proposal, but the written document was not provided until December 2014. It is alleged in the FASOC that on or about 18 December 2014, the plaintiff and Trimont entered into an Asset Development Agreement (ADA) comprising a terms sheet and attached letter dated 10 December 2014. Martin van der Bergt signed the terms sheet on 18 December 2014.[16]
[16]FASOC [7].
In his affidavit Martin van der Bergt states that ‘[g]iven the assurances of both Ascenzo and Breckenridge of their expertise in development projects…I agreed to the proposal contained in the ADA’.[17] In its outline of submissions, Counsel for the plaintiff describes these events as:[18]
At the urgings of, and relying on, Mr Breckenridge, Coonwarra entered into an Asset Development Agreement (ADA) with the second defendant (whose obligations under the ADA were later assumed by the first defendant (CornoNero)).[19] Mr Breckenridge was a director and chief executive officer of CornoNero.[20]
[17]Van der Bergt affidavit [14].
[18]Outline of Submissions of Plaintiff, [20].
[19]Van der Bergt affidavit [12].
[20]Van der Bergt affidavit [19].
This description that the plaintiff entered into the ADA at the urgings of, and in reliance on, Breckenridge is not, however, pleaded. The FASOC simply pleads the entry into the ADA, preceded by allegations concerning the role of Breckenridge as a de facto director and the ‘moving mind’ of Trimont, as a director and chief executive of Cornonero Pty Ltd (Cornonero) and as a guarantor, from about 8 August 2015, of the obligations of Cornonero under the ADA (as to which see below). There is no reference in the FASOC to representations leading to the entry into the agreement for lease or the ADA.
Under the ADA, Trimont or its nominee were, subject to various conditions precedent, to develop the Mernda Property as a mixed use development including a supermarket and associated retail uses. The developer was responsible for all aspects of the development, including obtaining finance for the development ‘to the satisfaction of both parties’, which was estimated to cost $1.5m to $1.9m.[21] The plaintiff was required to grant such security (over the Mernda Property) as was required to enable the developer to obtain finance for the development, including a mortgage over the Mernda Property and a charge over the interest of the plaintiff under the ADA and the development.[22]
[21]Van der Bergt affidavit, exhibit MVB-6, 4.
[22]Van der Bergt affidavit [15], exhibit MVB-6.
Under the ADA there is provision for the revenue from the development to be distributed, first to borrowings, second to the agreed land value to the plaintiff, being $6.5m (increased by CPI annually), third to certain developer’s costs and finally profits split 50/50 between the plaintiff and the developer.
The ADA was a proposed terms sheet which was put forward by Trimont as a prelude to the preparation of an asset development agreement by its lawyers. This never occurred. The parties proceeded under the agreement contained in the proposed ADA.
The FASOC pleads that by the entry into the ADA, the plaintiff and Trimont entered into a partnership or a joint venture, the terms of which included implied contractual obligations allegedly owed by Breckenridge personally to the plaintiff to act honestly and in good faith towards the plaintiff, to act in the best interests of the plaintiff and not to gain an advantage for themselves, directly or indirectly, or act to the detriment of the plaintiff.[23] Breckenridge denies any such terms.
[23]FASOC [9(i)].
In accordance with the ADA, Breckenridge requested the plaintiff give security for development funding arranged by Breckenridge. Funds were advanced to Trimont and then later Cornonero pursuant to three facilities, the last two apparently consolidated, as I shall explain.
The first facility was pursuant to a loan agreement dated 23 December 2014 between Berkeley Capital Partners Pty Ltd (BCP), as agent for disclosed principals, and the plaintiff.[24] The loan amount was $1.5m for a period of three months. It was secured by a mortgage over the Mernda Property and a guarantee given by Martin van der Bergt. The exhibited loan agreement is missing one page of the schedule where the interest rate should be identified.[25]
[24]There was just one principal, Aida Nominees Pty Ltd as trustee for the Minc Family Trust: Van der Bergt affidavit, exhibit MVB-5.
[25]Van der Bergt affidavit, exhibit MVB-5.
The FASOC pleads that Ascenzo and Breckenridge instigated the first loan. The loan moneys were advanced to Trimont (since in liquidation). The director of the mortgage broker (BCP), a Mr Brett Hartwig, told Martin van der Bergt that Ascenzo Industries Pty Ltd would be responsible for the loan. This was confirmed by a letter dated 20 February 2015 from Mr Hartwig of BCP.[26] The pleading does not make clear what follows from this alleged fact, save that there is a claim in the prayer for relief against Ascenzo and Breckenridge for a debt of $1.5m plus interest.
[26]Van der Bergt affidavit [16], exhibit MVB-7. The letter records $1m was paid to Ascenzo Industries Pty Ltd on 23 December 2014 ‘in recognition of the fees and costs expended by AI to date on the Mernda Development’, and a further $500,000 was paid to Ascenzo Industries Pty Ltd ‘for future costs and working capital requirements’.
The FASOC alleges that the first loan was in breach of the ADA, was not for the benefit of the ADA, nor did it assist the development, was in breach of the obligations of Trimont under the ADA and was in breach of fiduciary duties of Breckenridge and Ascenzo to the plaintiff, was commercially unsuitable, and was not used for the development.[27]
[27]FASOC [15], noting that the cross reference in that paragraph are incorrect.
During 2015 Martin van der Bergt was given updates on interest from potential purchasers. He understood, it would seem mistakenly, that this was for the sale of Lot A alone and that Lot B would be retained for future development.[28]
[28]Van der Bergt affidavit [17].
The second facility was pursuant to a loan agreement dated 7 August 2015 and was for $5.2m. It is between the plaintiff as borrower and BCP as agent for two disclosed principals. It was to be advanced in two tranches. Tranche 1 of $2.5m was agreed to be advanced on or around 7 August 2015 to fund fees and costs incurred up to that date in relation to the planned development of the Mernda Property. Tranche 2 of $2.7m was to be advanced on or around 21 August 2015 to fund fees and costs incurred to date in relation to the planned retail development at the Mernda Property and to refinance the first facility, which was projected to have a payout of $1.624m. The term, again, was three months, repayable on 7 November 2015 at an annual interest rate of 15% and a default rate of 25%. It was secured by a mortgage over the Mernda Property and a guarantee given by Martin van der Bergt.[29]
[29]Van der Bergt affidavit [18], exhibit MVB-8.
It is pleaded that the second loan was disadvantageous to the plaintiff, not commercially viable, not for the purpose of advancing the ADA or the development of the Mernda Property, was in breach of the obligations of Trimont under the ADA, that the loan funds were advanced to a variety of payees, including the payment of debts owing to persons unrelated to the development.[30]
[30]FASOC [18]–[20].
In early 2016, it is alleged that Cornonero assumed the obligations of Trimont under the ADA. Breckenridge became a director and CEO of Cornonero and the project was thereafter managed and controlled by Cornonero and its officers, particularly Breckenridge.[31] How this happened is not explained nor is it expressly pleaded.[32]
[31]Van der Bergt affidavit, [19].
[32]After the hearing of the application, Cornonero filed an affidavit of its solicitor, Marelda Clement Hibberd, made 6 June 2018, in support of the striking out of certain paragraphs of the FASOC. The affidavit discloses the circumstances in which Cornonero acquired the business of Trimont.
In February 2016, the business that had been trading out of the Mernda Property, ceased trading and moved out in anticipation of commencement of development works. It was a garden centre and wholesale mulch business.[33] Also in February 2016, Breckenridge advised Martin van der Bergt that he had negotiated a further loan for the sum of $2.4m to fund further planning and construction costs. He did not tell van der Bergt why or for what the extra funding was required.[34]
[33]Van der Bergt affidavit [5], [20].
[34]Van der Bergt affidavit [20].
The third loan is recorded, so far as the plaintiff’s evidence and pleading reveals, by a terms sheet dated 18 February 2016 signed by Breckenridge. The borrower is the plaintiff and the lender BCP as agent for a disclosed principal. It is for a loan facility of $2.4m plus capitalised interest, fees and costs payable in two tranches, the first of $1.8m and the second of $600,000. The purpose of the loan is stated to be to provide a further bridging facility to facilitate the commencement of construction and extend sales negotiations of the Mernda Development. The term is, again, three months expiring on 31 May 2016 at an interest rate of 30% per annum accrued daily and capitalised monthly. The default rate is 35%per annum. There are substantial fees payable to BCP and the loan is again secured by a mortgage over the Mernda Property and a guarantee to be given by Martin van der Bergt.
It is pleaded in relation to the third loan agreement that Breckenridge was not and has never been a director or agent of the plaintiff nor authorised to execute documents on its behalf.[35] It is implied by this pleading, but not squarely alleged, that the loan agreement was entered into without the plaintiff’s authority. It is alleged that the sum of $1.8m was advanced under this loan agreement to various entities (mostly to Cornonero but also to a company called Minc Salon (Laverton) Pty Ltd) at the instigation of Cornonero, Breckenridge and/or Ascenzo. There is no mention of the second tranche of $600,000.
[35]FASOC [22].
The evidence given on behalf of Breckenridge by his solicitor Benjamin Allen reveals that after the terms sheet for the third loan agreement was signed by Breckenridge, a formal agreement was prepared, called an Amended and Restated Loan Agreement, dated 23 February 2016 (ARLA). By this agreement the second loan agreement was varied as set out in the ARLA. The consolidated loan amount was $7.6m comprising four tranches of $2.5m (drawn 10 August 2015), $2.7m (drawn 25 August 2015), $1.8m (drawn 24 February 2016) and $600,000 (to be drawn on or about 15 March 2016). Tranches one and two bear interest at 15% (default 25%) and tranches three and four at 30% (default 35%). It is secured by a mortgage over the Mernda Property and a guarantee by Martin van der Bergt. It appears to be signed by Martin van der Bergt.[36]
[36]Second Allen affidavit [6], exhibit BA-14.
A statement of the funds borrowed and to whom they were paid from the three loans was subsequently provided to Martin van der Bergt in late 2016 after settlement of the sale of the Mernda Property referred to below. Martin van der Bergt asserts that no funds were applied to the ADA but were paid to Cornonero for its own purposes, and that they were so directed by Breckenridge.[37] No documents or invoices relating to the approximately $7m have ever been provided by Breckenridge or any other defendant to Coonwarra. An example is the $1,500,000.00 of the first invoice that went to Ascenzo Industries for costs and fees on the development.[38] It is said that no documents substantiating these costs have ever been produced.
[37]Van der Bergt affidavit [23].
[38]Van der Bergt affidavit, exhibit MVB-7.
Breckenridge was said to be the moving force behind these loan agreements and Coonwarra relied upon his expertise in agreeing to provide security in respect of these borrowings.[39]
[39]Plaintiffs Outline of Submissions [22].
The FASOC pleads that the third loan was in breach of the ADA, disadvantageous and not commercially viable, not for the benefit of the ADA or for the development of the land under the ADA, was in breach of the obligations of Trimont or Cornonero under the ADA, and was made in breach of fiduciary duties allegedly owed to the plaintiff by Trimont, Cornonero, Breckenridge and Ascenzo.
Martin van der Bergt says that he became ‘uncomfortable’ about the lack of progress and the amount of borrowings and the terms of the loans. He continued to be assured by Breckenridge and Ascenzo that the matter was progressing. He claims that on 5 August 2016, Breckenridge provided a guarantee on behalf of Cornonero and himself personally that the funds owing to Coonwarra would be paid.[40]
[40]Van der Bergt affidavit [24], exhibit MVB-11.
The pleading relating to this guarantee is that Cornonero, further or alternatively Breckenridge, guaranteed the payment of $6.5m plus interest as specified in the ADA and payment of 50% of the profits (after costs) from the Development Sum (as defined in the ADA).[41] The particulars of these allegations refer to a letter dated 5 August 2016 from Breckenridge to Martin van der Bergt in which Breckenridge as a director and CEO of Cornonero confirmed acceptance of the ADA and-
[41]FASOC [25]-[26].
I wish to personally guarantee the following payments from the Development Sum payable to Cornonero under its Development Agreement with Mernda Junction Shopping Centre Pty Ltd.
It is proposed that the following payments will be guaranteed from the Residual Payment at the completion of the Development Agreement, less any progress claims to Coonwarra as agreed along the way:
1.Land Payment (as per ADA) of $6.5m plus the specified interest payable.
2.50% of any profit payable after audit/agreed costs are deducted from the Development Sum.
I look forward to formalising this agreement and the type of security with you, however as discussed with Ben, I am comfortable in underwriting a guaranteed level of profit as per our original ADA and its associated Estate Master Feasibility.
I pause to observe that the defence now filed by Breckenridge disputes that this amounted to a personal guarantee by Breckenridge. It is just as likely to be, as Breckenridge now pleads, a proposal for Cornonero to provide a guarantee in respect of the monies to which the plaintiff was entitled under the ADA, to be the subject of a formal agreement.[42]
[42]Defence filed 6 June 2018 [26].
The FASOC then pleads a formal guarantee given by Cornonero to similar effect.[43] The formal guarantee produced by Martin van der Bergt is called a Development Guarantee. It is undated. It describes the plaintiff as the Investor and Cornonero as the Developer. It identifies the ADA as the existing agreement and refers to a Development Agreement between Mernda Junction Shopping Centre Pty Ltd (MJSC) and Cornonero (Development Agreement). Under the Development Guarantee, Cornonero ‘offers a guarantee’ to the plaintiff ‘under the current obligations covered in the ADA’, in the form of a Land Value payment of $6.5m (plus interest) upon Centre Completion as defined in the Development Agreement. That is the date of practical completion of construction of the Shopping Centre set for 20 December 2017, subject to causes of delay and extensions ‘as covered’ in the Development Agreement. The Development Guarantee goes on to ensure that the latest possible day for payment ‘of the obligations and guaranteed sum’ ($6.5m presumably) is a Sunset Date of 1 November 2018. The document goes on to provide that the ‘Guaranteed amount’ is to be paid in full no later than the Sunset Date and is to be paid from the Residual Amount, which is the Residual Payment under the Development Agreement.
[43]FASOC [27].
Having regard to the terms of the Development Agreement between MJSC and Cornonero referred to below, I infer the Development Guarantee was entered into on about the same date, 9 August 2016.
The FASOC alleges that the Development Guarantee has been ‘breached’ because the date for practical completion cannot be met.[44] It is then alleged that on or about 9 August 2016 the plaintiff entered into an agreement to sell the Mernda Property to MJSC and Bridgehurst Pty Ltd for the sum of $8.58m (inclusive of GST) and on about 15 September 2016 transferred the Mernda Property to MJSC and Bridgehurst. Breckenridge’s solicitor, on information and belief, says the settlement of the sale occurred on 25 August 2016 and was subject to the plaintiff entering into a Purchasers Deed, which is not referred to in the FASOC or the plaintiff’s evidence.[45]
[44]FASOC [28].
[45]Second Allen affidavit [9].
In his affidavit Martin van der Bergt explains that he had been suffering from cancer since 2013, but having received a positive report of his treatment in August 2016 he decided to take his wife on a holiday for several weeks. At the suggestion of Breckenridge the plaintiff gave a power of attorney to Martin’s son, Ben van der Bergt, in case any company documents needed to be executed in his absence.[46]
[46]Van der Bergt affidavit [26].
Shortly after Martin van der Bergt left for holidays, Breckenridge presented Ben with a contract of sale of the Mernda Property at the price of $7,800,000.00 plus GST. The transaction was executed by the plaintiff under the Power of Attorney held by Ben.[47] It was submitted by the plaintiff that the weight of increasing debt instigated by Breckenridge forced the sale of the Property.[48] As a result of the sale of the Property the plaintiff received the sum of $50,000.00. The rest went to repay the financiers organised by Breckenridge.[49]
[47]Van der Bergt affidavit [27].
[48]Plaintiff’s Outline of Submissions [25].
[49]Van der Bergt affidavit [28].
Neither the FASOC nor the plaintiff’s affidavits refer to the Development Agreement dated 9 August 2016 between MJSC and Cornonero, referred to in the Development Guarantee.[50] Under the Development Agreement MJSC is named the Owner and Cornonero the Developer. It is an agreement under which Cornonero is to develop a shopping centre complex on the Mernda Property for the Owner for a Development Sum of approximately $25.5m, subject to adjustments. The Agreement provides for practical completion by 17 November 2017 and a sunset date of 1 November 2018 (as in the Development Guarantee).[51] It shows, amongst other things, that a great deal of work was done in preparation for the development to be undertaken under the Development Agreement, including a proposed Plan of Subdivision, an agreement for lease with Coles Supermarkets Australia Pty Ltd (Coles), retail development plans, consulting engineering report, and other consultants work. It includes an acknowledgement that part of the development works to be undertaken under the Development Agreement may have been carried out prior to the entry into the Agreement.[52]
[50]Second Allen affidavit [8], exhibit BA-15.
[51]By cl 24.2 of the Development Agreement the Owner could terminate the Agreement if the centre is not completed by the Sunset Date. In that event the Developer had the right to buy back the Mernda Property.
[52]The Development Agreement is executed by Cornonero by its directors Brett Hartwig and Breckenridge.
Another relevant agreement neither pleaded nor referred to in the plaintiff’s affidavits is a Purchasers Deed between the plaintiff, Coles and MJSC. The execution of that Deed was a condition of settlement of the sale of the Mernda Property to MJSC. It provides for a transfer of the agreement for lease between the plaintiff and Coles to the purchaser, MJSC. It was signed on behalf of the plaintiff by Ben.[53]
[53]Second Allen affidavit [9]-[10], exhibit BA-17.
The plaintiff claims damages against Breckenridge for breach of the letter of guarantee allegedly given by him, equitable damages as a person knowingly assisting Trimont and Cornonero in a dishonest and fraudulent design to use the Mernda Property to obtain funds to be used for purposes other than the development of that property and, perhaps, damages for procuring Trimont and Cornonero to breach the ADA and their alleged fiduciary duties to the plaintiff, the letter of guarantee and the Development Guarantee.
Defendants submissions
Breckenridge submitted that there were clear factual and legal disputes between the parties which had the result that the Court was not in a position to find, to the requisite degree, that the plaintiff’s impecuniosity was caused by the conduct of Breckenridge. Further, to attract any or any significant weight to the issue of the cause of the plaintiff’s impecuniosity would be to embark upon an assessment as to the prospects of success of the claim and the merits of the parties respective positions. That, it was submitted, was not a practical exercise in this case, because it is a case of reasonable complexity.
Breckenridge submitted, and it is clear, that the plaintiff carries the burden of persuasion on the question of whether the conduct of Breckenridge was the cause of its financial difficulties and that there must be a solid foundation for that conclusion.
At the heart of the plaintiff’s complaint is the allegation that the actions of Breckenridge and Ascenzo have caused the plaintiff to lose the Mernda Property. The plaintiff fails, it was submitted, to acknowledge that its entry into the various loans particularised in the FASOC were at its own commercial discretion. There is no suggestion in the pleading or in the van der Bergt affidavit that it did so under duress or that the loan agreements were fraudulently executed. The terms of the ADA provided for the plaintiff, as the owner of the Mernda Property, to grant such security as is required to enable the developer (which at that time was Trimont) to obtain finance for the development of the Mernda Property.[54] Indeed, the plaintiff pleads that by the entry into the ADA it agreed to grant such security as was required to enable the developer to obtain finance for the development on conditions acceptable to both parties.[55]
[54]Van der Bergt affidavit [15], exhibit NVB–6.
[55]FASOC [9(e)], [9(h)(iii)].
The circumstances in which the plaintiff elected to offer security over the Mernda Property for the purposes of the development, and whether those circumstances were such as to amount to a breach of any personal obligation on the part of Breckenridge, will be contested by Breckenridge at trial. In particular, Breckenridge denies:
(a) the existence of an implied contractual obligation allegedly owed by him personally to the plaintiff under the ADA.[56] This obligation is pleaded in the FASOC as a duty to act honestly and in good faith towards, and in the best interests of, the plaintiff under the ADA and not to gain directly or indirectly an advantage for himself or cause a detriment to the plaintiff;
[56]FASOC [9(i)].
(b) that he was the controlling mind of Trimont;[57]
[57]FASOC [4(b)], [11(c)].
(c) that he owed fiduciary duties to the plaintiff and/or that he breached any such fiduciary duties;[58]
(d) that he guaranteed the obligations of Cornonero or Trimont by reason of the letter dated 5 August 2016[59] and if any guarantee is found to have been made, it ceased to have effect once the Development Guarantee was executed by Cornonero and the plaintiff;[60]
(e) that he knowingly assisted Cornonero and Trimont to commit breaches of fiduciary duties.[61]
[58]FASOC [15(d)], [20(e)], [24(e)].
[59]FASOC [26].
[60]FASOC [27].
[61]FASOC [46].
It is of significance to the disputes of fact that arise in the proceeding that Breckenridge denies that he had any authority to, and did not, disburse loan funds advanced by BCP or otherwise direct how they should be disbursed, as alleged. He will also deny that he otherwise had control over any loan moneys advanced under the various loan agreements or any oversight as to how the loan moneys would be used.
Breckenridge submits that the defence to be filed on his behalf will allege that the plaintiff elected to enter into, and had full knowledge of, the loan agreements, the ARLA, the ADA, the Development Guarantee, the Development Agreement, the contract of sale of land and the Purchaser’s Deed. The plaintiff alleges that the several loans were disadvantageous to it or otherwise commercially unsuitable.[62] But there is no evidence provided, apart from the term of the loans, to support these allegations.
[62]FASOC [15(e)], [20(a)], [24(b)].
Breckenridge submitted that the plaintiff made a commercial decision to sell the Mernda Property on the basis it could assert its rights under the Development Guarantee against Cornonero.[63] The plaintiff’s knowledge of the sale is evidenced by its execution of the Purchaser’s Deed (pursuant to which the plaintiff’s lease with Coles Supermarkets was transferred to the purchaser), the contract for sale of land and Mr Ben van der Bergt’s continued involvement in the development after the completion of the sale, as evidenced by his apparent attendance at the meeting with the purchaser and Cornonero on about 14 October 2016.[64]
[63]Second Allen affidavit [13(e)].
[64]See second Allen affidavit, exhibits BA–16, BA–17 and BA–18.
Quite apart from these factual disputes, a fundamental matter stands in the way of the plaintiff establishing that Breckenridge caused or contributed to its current impecuniosity. It is clear from the ADA that the plaintiff knew from the outset that it would be required to offer its only asset as security for the financing of the development and, consequently, if the development were unsuccessful or otherwise encountered difficulties, the plaintiff risked losing its only asset. Thus, an available cause of the claimed loss was the commercial risk of a failed property development.
Breckenridge also submitted that it was unclear from the current pleading:
(a) how the fiduciary obligation on the part of Breckenridge arises;
(b) how in the circumstances where Breckenridge did not obtain any personal advantage from the transaction and had no involvement in the handling of loan funds he could be found liable pursuant to a Barnes v Addy[65] claim for knowing assistance or knowing receipt; nor
(c) the basis on which the plaintiff is able to assert any rights against Breckenridge personally in circumstances where all the relevant commercial agreements were between the plaintiff, Trimont, Cornonero or other corporate entities.
[65](1874) LR 9 Ch App 244, 251–2.
Consideration
I agree generally with the submissions made on behalf of Breckenridge. In order to find that the plaintiff’s impecuniosity has been caused or contributed to by the conduct of Breckenridge it is necessary to undertake an assessment of the prospects of success of the claim and the merits of the parties’ respective positions. That task is not a practical exercise in this case, for at least four reasons. First, because it is a factually and legally complex case. Second, the plaintiff’s pleadings are still in development and do not properly plead the matters of fact that need to be pleaded to make out its claims (it is plain that the current pleading requires amendment to conform with the principles of pleading). Third, because there is a disconformity between the facts advanced by the plaintiff in the van der Bergt affidavit and the pleading in the current FASOC and between those matters and the facts disclosed in the second Allen affidavit. Fourth, because the consequences, legal and factual, arising from the entry into the Development Guarantee and the construction of the Mernda Junction Shopping Centre pursuant to the Development Agreement, may mean that the plaintiff has not lost the value of its sole asset.
There is no evidence before me as to the construction of the shopping centre, what stage it has reached or any other facts that might show whether the present impecuniosity of the plaintiff is its ultimate fate or whether it will recover a significant sum from Cornonero pursuant to the Development Guarantee. Attempting to forecast factual and legal outcomes based on the complex facts revealed is impossible.
The plaintiff carries the burden of persuasion on the question of whether the conduct of Breckenridge was the cause of its financial difficulties and the authorities show that there must be a solid foundation for that conclusion. Although at present the financial position of the plaintiff is accepted to be parlous, whether that is through the conduct of Breckenridge or, as he submits, is through the plaintiff’s own conduct and decisions, is a conclusion that cannot be satisfactorily determined at this stage of the proceeding.
The plaintiff plainly entered into the various loans particularised in the FASOC, and more accurately set out in the second Allen affidavit. The entry into the loan agreements must have followed decisions it made. If they were disadvantageous, and induced by conduct of the defendants that is actionable, and that is by no means certain, the plaintiff cannot satisfy the Court at this stage of the proceeding that it can slough off responsibility for its own actions. There is no suggestion in the FASOC or in the van der Bergt affidavit that the plaintiff entered into the loan agreements under the influence of actionable misrepresentations or under duress, or that the loan agreements were fraudulently executed.
It is clear that the terms of the ADA, as pleaded by the plaintiff, provided for the plaintiff, as the owner of the Mernda Property, to grant such security as was required to enable the Developer (which at that time was Trimont) to obtain finance for the development of the Mernda Property.[66] Trimont is in liquidation and there is a real issue about how Cornonero became, if it did, liable under the ADA. This much seems possible, that under the Development Guarantee Cornonero may be liable, depending on the outcome of the Development Agreement, for the liability of Trimont under the ADA. It may be that the plaintiff has not yet lost the total value of its sole or principal asset, the Mernda Property.
[66]Van der Bergt affidavit [15], exhibit NVB–6.
Quite apart from these difficulties of now being satisfied that Breckenridge may have caused or contributed to the impecunious financial position of the plaintiff, whether the allegations made against him are such as to amount to a breach of any personal obligation on his part will be contested by Breckenridge at trial as referred to above (above at paragraphs [51]–[55]).
For these reasons, I consider that the ground of resisting an order for security relied on by the plaintiff is not made out. I am also satisfied that the admitted impecuniosity of the plaintiff both enlivens the jurisdiction to make an order for security for Breckenridge’s costs, and is also a decisive factor in favour of making such an order.
Quantum of security
Breckenridge relies on the evidence of his solicitor, Mr Allen, in the first Allen affidavit to quantify the costs for which security is sought. He is an experienced litigation solicitor, who describes the future work that is in his opinion likely to be necessary in the defence of the claims in the FASOC. He gives a detailed summary of the work and costs likely to be involved up to a mediation of the proceeding for both solicitors ($218,000) and Counsel ($48,200). He estimates that recovery of those fees on a standard basis after taxation will be 70% for solicitors fees and 100% for Counsel. His estimate of fees up to and including a trial of 5 days is $415,810 for solicitors and $116,200 to $118,500 for Counsel. Mr Allen, as the partner of Dentons Australia Pty Ltd (Dentons), the solicitors acting for Breckenridge, calculates his and his firms costs on the basis that r 63.44 of the Rules will allow Dentons’ professional fees in an amount appropriate to the place where the work is done, New South Wales.
The plaintiff relied on the calculations of a costs consultant, Mr Peter Trimbos (Trimbos), who provided the plaintiff’s solicitor with a calculation of costs on a party/party basis up to mediation.[67] The figure to which Trimbos arrives is about $47,000. Breckenridge initially objected to the admissibility of Trimbos’ report as not properly based as an expert report pursuant to Order 44 of the Rules. That fell to the way-side after it was pointed out that in interlocutory applications, Order 44 was not required to be complied with and, in any event, the calculation of Trimbos, even without the instructions on which they were based, was an aid to the Court in its assessment of the costs likely to be allowed in accordance with the costs scale in Victoria.
[67]First Nixon affidavit, exhibit SN-1.
Counsel for Breckenridge also criticised the Trimbos assessment because it made no allowance or insufficient allowance for a number of steps, being: further particulars, attendance at various directions hearings, lay evidence for the purpose of mediation, an overly limited allowance for discovery of documents, no allowance for mediation position papers and related costs. It is also evident that the costs will be increased by the number of defendants involved.
I accept for the purposes of calculation of an appropriate sum for security that the taxing officer may accept the costs of Dentons on the ’ordinary basis’ on which costs are assessed in New South Wales. In Samson Capital Pty Ltd v Westpac Private Equity Pty Ltd[68] Hargrave J permitted the recovery of the costs of Sydney solicitors in Victorian proceedings. His Honour held that the specific terms of r 63.44 ‘should be given their plain meaning’.[69] However, His Honour expressed the caveat that:
This interpretation of r 63.44 does not mean that all of the work performed by the defendant’s Sydney solicitors will, if it is successful and obtains a cost order, necessarily be allowed at the rates applicable in New South Wales. Although I am satisfied that it was reasonable for the defendant to engage Sydney solicitors as its principal solicitors in this proceeding, the taxing master’s discretion under r 63.29[70] should nevertheless be exercised for each item, or class of items, which it is claimed should be allowed. That is, in cases such as this the taxing master will ordinarily consider whether it was “necessary or proper for the attainment of justice or for enforcing or defending the rights of the party” to use the interstate solicitors for that aspect of the work? If so satisfied the charge should, “so far as practicable”, be allowed in the amount appropriate to the place where the lawyer practises. The words “so far as practicable” should be interpreted as meaning “insofar as the taxing master is reasonably capable of doing so on the basis of the evidence and his or her experience”.[71]
[68][2007] VSC 453; Pathway Investments Pty Ltd & Anor v National Australia Bank Limited [2012] VSC 97 [13] (Pathway).
[69]Samson Capital Pty Ltd v Westpac Private Equity Pty Ltd [2007] VSC 453, [13]; Pathway [2012] VSC 97 [13].
[70]Since repealed: see now r 63.28.
[71]Samson Capital Pty Ltd v Westpac Private Equity Pty Ltd [2007] VSC 453 [24].
It will therefore be the case that the solicitors for Breckenridge will need to show that items of the costs in respect of which it seeks security would be recoverable in accordance with the test prescribed by r 63.28 of the Rules, albeit that they are calculable on the NSW basis.
In ordering security for costs the Court does not set out to give complete and certain indemnity.[72] It is necessary to look at costs both in the broad, as well as scrutinizing the individual items – but not to the extent of minute examination. Descending into too much detail does not assist in the conduct of the exercise because by its nature it is necessarily imprecise and requires guesstimates as much as estimates.[73] The process of estimation embodies, to a considerable extent, necessary reliance on the feel of the case after considering relevant factors.[74] There must, however, be some substantiation of the likely standard costs to enable the Court to determine an appropriate amount of security based on estimated probable costs, insofar as those costs can be ascertained.[75]
[72]Brundza v Robbie & Co[No 2] (1952) 88 CLR 171, 175 (Fullagar J) (Brundza).
[73]Quadrant Constructions Pty Ltd v Morgan Smith Barney Aust Pty Ltd [2009] VSC 455 [56]; Pathway [2012] VSC 97 [15].
[74]Bryan E Fencott Pty Ltd v Eretta Pty Ltd [1987] 16 FCR 497, 515 (French J).
[75]Procon (Great Britain) Ltd v Provincial Building Co Ltd [1984] 1 WLR 557, 565 (Cumming-Bruce L.J.); Saint-Gobain RF Pty Ltd v Maax Spa Corporation Pty Ltd [2004] VSC 335 [71]; Quadrant Constructions Pty Ltd v Morgan Smith Barney Aust Pty Ltd [2009] VSC 455 [54]; Pathway [2012] VSC 97 [15].
The affidavit of Mr Allen on behalf of Breckenridge sets out a substantiation of the calculation of the anticipated costs, including a description of the work to be performed, the likely number of hours to be spent performing the particular tasks, the level of seniority of the lawyer who would be allocated to complete the task and the likely professional fees and disbursements that will be charged for that work.
Mr Nixon, by exhibiting the calculation by Trimbos, sets out a description of the work to be performed, but does not distinguish between the level of seniority of the solicitor performing the work. What the Trimbos calculation does is allow the rate per 6 minute unit, per hour or per day (as appropriate) in accordance with the current Supreme Court scale of costs.
The work anticipated by Dentons is more extensive than that itemised by Trimbos. The differences include that Dentons allow, and Trimbos does not, for the costs of security for costs application, requests for particulars, attendance at various directions hearings, lay evidence for the purpose of mediation, a more generous allowance for discovery of documents and allowance for mediation position papers.
When one drills down into the assessment of the costs of discrete matters the differences are:
(a) in relation to the costs of the defence by Breckenridge, the estimate by Dentons is $21,510 and that by Trimbos is $18,624;
(b) in relation to the costs of discovery, the estimate by Dentons is $41,350 and that by Trimbos is $15,411;
(c) in relation to the costs of mediation, the estimate by Dentons is $30,250 and by Trimbos approximately $15,400.[76] The main difference appears to be that Dentons have allowed for the preparation of a position paper and the preparation of a bundle for the mediator;
(d) Dentons include $26,800 for the costs of the security for costs application, $3,050 for request for particulars, $40,850 for reviewing the plaintiff’s outline of evidence, $101,800 for preparing the lay evidence for Brackenridge and $19,300 for three directions hearings.
[76]There is an error in the calculation of these costs by Trimbos, who allows for senior and junior counsel to attend but includes no disbursement for junior counsel. I have added junior counsels fee to Trimbos calculation.
Discount
In exercising its discretion to award security for a party’s costs, the Court is not required to give the party full protection for its estimated costs.[77] The calculation of a sum to be given as security for a party’s costs is not an occasion for a full assessment of costs. By its nature, the task involves a ‘broad brush’ assessment having regard to the information before the Court.[78] The existence of the discretion means that the Court is neither bound to give the amount of security that the party seeking the security estimates, nor must the amount be determined with mathematical precision.[79]
[77]St Gobain IF Pty Ltd v Max Spa Corporation Pty Ltd [2004] VSC 335 [71] (Habersberger J); Brundza (1952) 88 CLR 171, 175 (Fullagar J); Pathway [2012] VSC 97 [37].
[78]Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (1995) 134 ALR 187, 201 (Lindgren J); Reinsurance Australia Corp Ltd v HIH Casualty and General Insurance Ltd (in liq) [2003] FCA 803; Pathway [2012] VSC 97 [37].
[79]Idoport Pty Ltd v National Australia Bank Ltd & Ors [2007] NSWSC 23 [82]; Pathway [2012] VSC 97 [37].
Without limiting the discretion, Courts generally undertake a reduction in any sum claimed for security for costs to take into account:[80]
[80]Farmitalia Carlo Erba SrL v Delta West Pty Ltd (1994) 28 IPR 336, 344–6 (Farmitalia).
(a) the chance of the case collapsing prior to the mediation. It is not possible to anticipate this occurring in this case at this stage. However, as the sunset date under the Development Guarantee approaches, the extent to which the plaintiff has lost the value of the Mernda Property, or not, may become clearer;
(b) the apparent prospects of success, to the extent it is possible to assess those prospects. The weaker the plaintiff’s case appears on the merits, the stronger the case of the defendant for security becomes and the less inclined the Court should be to give any discount. In this case, it is not possible to assess the prospects just as it is not possible to say whether Breckenridge’s conduct may have caused or contributed to the plaintiff’s loss of the Mernda Property;
(c) that the order for security should not be the means of effectively denying the applicant the right to pursue the claim. This is related to the stultification factor and for the reason the Court could not take that into account, it cannot take it into account in assessing any discount;
(d) if very little information is put before the Court on which it can estimate the amount of costs, it might be reasonable to make a large discount, particularly since if security proves inadequate as the litigation progresses a further application may be made for more security. The evidence of the costs of Dentons being calculated on the basis of ordinary costs allowed in NSW needs to be taken into account in this case in formulating a discount because of the risk that on a taxation particular items will not be allowed at the rates ordinarily allowed in NSW;
(e) to the extent that some of the costs of the party seeking security will relate to a case that is not essentially defensive, a deduction should be made. That is not applicable in this case; and
(f) reductions on taxation of the costs to make allowance ‘for the unquenchable fire of human optimism and the likelihood that the figure of taxed costs put forward would not emerge unscathed after taxation’.[81]
[81]Procon (GB) Ltd v Provincial Building Co Ltd (1984) 2 All ER 368, 379; Farmitalia (1994) 28 IPR 336, 344, 346.
Taking into account all of the above matters, and using a broad brush, I would allow the following amounts for:
(a) the security for costs application - $18,000;
(b) obtaining further and better particulars - $1,500;
(c) defence, drawing and settling - $19,000;
(d) discovery of documents - $20,000; and
(e) attending directions hearings and other applications before mediation - $12,000
Total $70,500.
These figures do not distinguish between solicitors and Counsels fees and costs. In the Trimbos assessment it was accepted that the fees for Senior and Junior Counsel engaged by Breckenridge were reasonable in amount. They are within the allowance provided in the Victorian scale of costs. As I have mentioned, Mr Allen discounted Denton’s fees for the purposes of this application by 30%. In arriving at the figures set out above, I have taken into account that discount, which accords with the usual practice of discounting for the factors mentioned above, where they are applicable. I have not attempted a precise calculation, preferring instead an instinctive synthesis.
I am not persuaded that it is appropriate at present to allow for reviewing outlines of plaintiff’s evidence prepared for mediation, or preparing outlines of evidence for mediation. The outlines of evidence are not normally ordered before mediation. If outlines of evidence are ordered, application for further security may be made.
Taking into account all these matters, and undertaking an instinctive synthesis, I propose to order the plaintiff provide security for Breckenridge’s costs in the sum of $70,500 with liberty to apply after mediation for further security.
Conclusion
Breckenridge has established his entitlement to an order for security for his costs of the proceeding. The proposition advanced by the plaintiff to repel such an order, that Breckenridge’s conduct has, or even may have, caused or contributed to the plaintiff’s loss of its major asset, the Mernda Property, has not been made out at this stage. The appropriate sum for Breckenridge’s security is $70,500. I can at present see no reason why the costs of the application should not ordered to be paid by the plaintiff, but I will hear the parties as to those costs if necessary.
SCHEDULE OF PARTIES
| S ECI 2017 00190 | |
| BETWEEN: | |
| COONWARRA PTY LTD (ACN 063 839 832) | Plaintiff |
| - v - | |
| CORNONERO PTY LTD (ACN 606 176 069) | First Defendant |
| | |
| PETER ANDREW BRECKENRIDGE | Third Defendant |
| SILVIO ASCENZO | Fourth Defendant |
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