In the matter of Classic Corporation Pty Limited

[2016] NSWSC 1974

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Classic Corporation Pty Limited [2016] NSWSC 1974
Hearing dates:	Monday, 14 March 2016
Date of orders:	14 March 2016
Decision date:	14 March 2016
Jurisdiction:	Equity - Corporations List
Before:	Brereton J
Decision:	Plaintiffs to give security for the fourth and fifth defendants’ costs of the proceedings in sum of $90,000
Catchwords:	PROCEDURE – costs – security for costs – relevant considerations in exercising discretion for making order for security – quantum
Legislation Cited:	(CTH) Corporations Act 2001, s 1335 (NSW) Uniform Civil Procedure Rules 2005, r 42.21
Category:	Costs
Parties:	IJG Group 2 Pty Limited (first plaintiff) Classic Corporation Pty Limited (in liq)(first defendant) David Solomons (second defendant) Cinzia Hanna (fourth defendant) Lillian Hanna (fifth defendant)
Representation:	Counsel: C Alexander (plaintiffs) A Spencer (first/second defendant) JT Johnson (fourth/fifth defendant)   Solicitors: Lexes Lawyers (plaintiff) Dora Anna Jabbour (first/second defendant) Hall Partners (fourth/fifth defendant)
File Number(s):	2015/164680

Judgment (EX TEMPORE)

1. HIS HONOUR: By interlocutory process filed on 3 September 2015, the fourth and fifth defendants Cinzia Hanna and Lillian Hanna seek an order pursuant to (CTH) Corporations Act 2001, s 1335, or alternatively (NSW) Uniform Civil Procedure Rules 2005, r 42.21, that the plaintiffs give security for the fourth and fifth defendants' costs of the proceedings.

2. Today, the plaintiffs conceded that for the purposes of Corporations Act, s 1335, there was reason to believe that it would be unable to pay the costs of the fourth and fifth defendants if the defendants were successful in their defence. Accordingly, the threshold test for an order for security is surmounted, leaving for consideration the questions of discretion and quantum.

3. As to discretion, a number of issues were raised on behalf of the plaintiffs as to why an order for security should not be made, despite its admitted impecuniosity.

4. As has not infrequently been pointed out, relevant considerations in deciding whether or not to make an order for security include the strength and bona fides of the plaintiffs' case; whether the plaintiffs' impecuniosity has been caused by the defendants' conduct, which is the subject of the claim; whether the application for security is being used to deny the impecunious plaintiffs the ability to litigate; whether there are any persons standing behind the plaintiffs who are likely to benefit, but are unwilling to provide security or offer any undertaking in respect of costs; whether the plaintiff is in substance a plaintiff or in truth acting defensively; and the public interest, if any, in the litigation. The plaintiffs sought to invoke virtually all of those considerations as discretionary factors in its favour.

5. In the substantive proceedings, the plaintiffs face a number of difficulties, but there are also a number of factors which suggest that the plaintiffs’ case is a viable one. As against the first, second and third defendants, the plaintiffs are seeking to set aside the liquidator's disclaimer of a contract under which the plaintiffs were to acquire land from the company, and then specifically to enforce that contract or, alternatively, to recover the deposit paid under it. Those defendants admit that the plaintiffs are entitled at least to recover the paid deposit of $130,000 – which would ordinarily be secured by way of lien on the subject matter of the contract. However, the fourth and fifth defendants have a registered mortgage which is said to secure a sum in excess of $7 million – vastly in excess of the value of the land, which is perhaps in the order of $2.36 million. In those circumstances, the plaintiffs' lien is likely to rank behind the defendants' registered mortgage. It is for that reason that the plaintiffs contend that the mortgage secures no debt, and is in substance a sham. It is this contention that brings the fourth and fifth defendants into the proceedings.

6. In some cases, where it can be seen the plaintiff’s case is a very strong one, the court may decline to make an order for security, even where one would otherwise be made. In others, where it can be seen that the plaintiff’s case is very weak, the court may more readily make an order for security. The argument that the mortgage is a sham is not hopeless; there are a number of indicia which render it conceivable that an inference of sham might be drawn. On the other hand, even before reaching that argument, the plaintiffs have a number of hurdles to surmount, and the task of showing that a registered mortgage is a sham is no easy one. Accordingly, in my view in this particular application, the strength and bona fides of the plaintiffs' case is a relatively neutral factor.

7. The plaintiffs also submitted that they were in substance defendants. Even if that could be said in respect of the proceedings impugning the disclaimer – in the sense that the plaintiffs were responding to an act of the liquidator – that cannot be said in respect of their case against the fourth and fifth defendants, in which the plaintiffs are impugning a transaction on the grounds of sham. There is nothing about that claim which puts them in the position of substantive defendants, as opposed to plaintiffs. As against the fourth and fifth defendants, the plaintiffs are the moving parties in every sense of the word.

8. It was submitted that delay disqualified the fourth and fifth defendants from seeking security. The fourth and fifth defendants were joined to the proceedings by orders made on 11 August 2015, when the plaintiffs were granted leave to amend to introduce the causes of action against them. They filed their applications for security on 3 September 2015, very promptly. They did not press for immediate resolution of the security application, but instead sought to have questions concerning the pleadings first resolved and, subsequently, to agitate for the determination of a separate question – which they ultimately abandoned. The plaintiffs must be taken to have been on notice from a very early stage that sooner or later they would have to deal with an application for security. There is no disqualifying delay in making the application for security, nor does delay provide a reason for excluding costs incurred to date, as distinct from costs yet to be incurred, from the scope of any security to be ordered.

9. Next, it was said that Mr Nakhle, the director of the first plaintiff, had already proffered a personal undertaking to secure the plaintiffs’ undertaking as to damages, given in connection with an order extending the operation of the plaintiffs' caveat in respect of the subject land. The short answer is that an undertaking to secure the undertaking as to damages does not provide security for the fourth and fifth defendants' costs. It would be different if Mr Nakhle had offered an undertaking in respect of the fourth and fifth defendants' costs, but he has not.

10. Perhaps the strongest argument advanced for the plaintiffs was that they were already out of pocket, to the extent of $130,000 paid to the company as the deposit under the option deed, which the company and its liquidators conceded would in any event have to be reimbursed to the plaintiff. However, the difficulty is that the $130,000, secured by a lien on the subject land, is likely to rank after the fourth and fifth defendants' mortgage which, if it does secure $7 million, will leave no equity by way of security for the plaintiffs' deposit. The $130,000 is recoverable from the company but not from the fourth and fifth defendants, albeit that they were shareholders in and directors of the company but, as the parties apparently agree, were not involved in its management – the suggestion being that Danny Hanna, the husband of one of the directors, had the management of the company. If it were reasonably clear that the $130,000 had come into the hands of the fourth and fifth defendants, that would be a relevant consideration, but there is no evidence to that effect. One simply does not know what has happened with it, and there is no reason why I should presume that it has been used to the benefit of the fourth and fifth defendants as distinct from in the business of the now failed company.

11. Moreover, there is no evidence that making an order for security would stultify the proceedings. In particular, there is no evidence that those with a beneficial interest in the plaintiffs, who will ultimately benefit if the proceedings are successful, do not have resources with which they could satisfy an order for security for the fourth and fifth defendants' costs. To the contrary, the fact that Mr Nakhle has been prepared to give a personal undertaking in connection with the undertaking as to damages suggests that he may well be in a position to make resources available to provide security for a costs order adverse to the plaintiffs. The unwillingness of those who stand behind an impecunious company to expose their own resources is a powerful factor in favour of making an order for security.

12. Accordingly, I am of the view that an order for security should be made.

13. As to quantum, the defendants adduced evidence that the costs of the proceedings up to and including the hearing, after exclusion of an amount attributable to an existing order that certain costs be the plaintiffs’ costs in the proceedings, are likely to be in the order of $105,000 on the party/party and $115,000 on the indemnity basis. However, an order for security is not meant to be a complete indemnity, and there is no reason why, in this case, the ultimate recovery for the purposes of a security order should be assessed on an indemnity basis.

14. It seems to me that the fourth and fifth defendants' solicitors' assessment of $105,000, which was not the subject of a challenge or cross-examination, is a reasonable one, subject to two matters. Those two matters are, first, senior counsel's fees, which seem to me to be a little higher than appropriate to allow on a security application. That is not to say for a moment that they are unreasonable, but simply that it is not reasonable to expect the plaintiff to cover them by way of security in full. Secondly, the estimate must include some amount in respect of the costs of the application for determination of a separate question which ultimately was unsuccessful and in respect of which the fourth and fifth defendants were ordered to pay the plaintiffs' costs.

15. When those matters are taken into account, I think the sum of $90,000 is appropriate.

16. The Court therefore orders that:

1. The plaintiffs give security for the fourth and fifth defendants' costs of the proceedings in the sum of $90,000 in a form acceptable to the Registrar within 28 days;

2. The proceedings be stayed unless and until the security is given;

3. The proceedings be adjourned to 18 April 2016 at 10am in the Corporations Judge’s directions list for further directions; and

4. The plaintiffs pay the defendants' costs of the interlocutory process filed 3 September 2015 in so far as they are attributable to the claim for relief in order (2) thereof.

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Decision last updated: 22 June 2018