Laith & Fadi Investments Pty Ltd v Fogo Brazilia Holdings Pty Ltd

[2024] NSWSC 1508

Supreme Court

New South Wales

Medium Neutral Citation:

Laith & Fadi Investments Pty Ltd v Fogo Brazilia Holdings Pty Ltd [2024] NSWSC 1508

Hearing dates:

30 September 2024

Date of orders:

28 November 2024

Decision date:

28 November 2024

Jurisdiction:

Equity - Commercial List

Before:

McGrath J

Decision:

Plaintiffs to provide further security for the defendants’ costs

Catchwords:

COSTS — security for costs — representative proceedings — where proceedings funded from the outset by litigation funder and funding agreement terminated by funder on the basis of alleged breaches of it by the lead plaintiffs — where lead plaintiffs suing for the benefit of others — impecuniosity of the lead plaintiffs and inability to meet an adverse costs order — no causal connection between plaintiffs’ impecuniosity and defendants’ conduct — whether proceedings likely to be stultified if an order for security is made — lead plaintiffs’ failure to provide precise information of financial position of those standing to benefit from successful outcome of the litigation — insufficient evidence upon which to base finding of inability as opposed to unwillingness of group members to contribute towards an order for security — risk of injustice to the defendants in incurring substantial costs without having appropriate security — quantum of security determined adopting broad brush approach — HELD — security ordered to be paid in instalments

Legislation Cited:

Civil Procedure Act 2005 (NSW) ss 67, 98, 168, 169, 181

Competition and Consumer Act 2010 (Cth) ss 51AD, 51ACB, 82, 87, 236, 243; Sch 2 – Australian Consumer Law, ss 18, 21

Corporations Act2001 (Cth) s 1335

Federal Court of Australia Act 1976 (Cth) ss 43(1A), 56

Legal Profession Uniform Law2014 (NSW) ss 180, 181

Uniform Civil Procedure Rules 2005 (NSW) r 42.21

Cases Cited:

Abbott v Zoetis Australia Pty Ltd (No 2) [2019] FCA 462; (2019) 369 ALR 512

Bell Wholesale Co Limited v Gates Export Corporation (1984) 2 FCR 1; [1984] FCA 34

Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317; [2003] FCAFC 153

Broadway Plaza Investments v Broadway Plaza Pty Ltd; In the matter of Combined Projects (Arncliffe) Pty Ltd [2019] NSWSC 1082

Capic v Ford Motor Company (No 2) [2016] FCA 1178

Carrano Investment Holding Pty Ltd v Siennamia Investments Pty Ltd [2022] NSWCA 262

Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11

De Jong v Carnival PLC [2016] NSWSC 347

Di Francesco v Pioneer Energy Pty Limited (No 2) [2014] NSWSC 1923

Eades v Endeavour Energy [2018] NSWSC 801

Flip Out Thornton Pty Ltd v Flip Out – Trampoline Arena Franchises Pty Ltd [2023] NSWSC 1094

General Trade Industries Pty Ltd (in liquidation) v AGL Energy Limited (No 2) [2023] FCA 556

Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2002] NSWSC 609

Its EcoPty Ltd v BPS Financial Ltd [2022] FCA 842

Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276; [2007] NSWCA 291

Live Board Holdings v Cody Live Pty Ltd [2017] NSWCA 302

Louise Haselhurst v Toyota Motor Corp Australia Ltdt/as Toyota Australia [2020] NSWSC 1607

LRSM Enterprise Pty Ltd v Zurich Australian Insurance Limited [2014] NSWCA 88

Madgwick v Kelly (2013) 212 FCR 1; [2013] FCAFC 61

Metro Environmental Logistics Pty Ltd v Newcastle Port Corporation (No 5) [2024] NSWSC 714

Pioneer Park Pty Ltd (in liquidation) v Australia and New Zealand Banking Group Ltd (2007) 65 ACSR 383; [2007] NSWCA 344

Porter v Gordian Runoff Limited [2004] NSWCA 171

Category:

Costs

Parties:

Laith & Fadi Investments Pty Ltd (First Plaintiff)
Laith Karim Hana (Second Plaintiff)
Fogo Brazilia Holdings Pty Ltd (First Defendant)
Ian David Dresner (Second Defendant)
Hilton Seskin (Third Defendant)
Lazarus Legal Group Pty Ltd (Fourth Defendant)

Representation:

Counsel:
N Li (Plaintiffs)
A Vial (First and Second Defendants)
S Sykes (Third Defendant)
T Epstein (Fourth Defendant)

Solicitors:
Levitt Robinson (Plaintiffs)
Lazarus Legal Group Pty Ltd (First and Second Defendants)
APA Lawyers (Third Defendant)
Sparke Helmore Lawyers (Fourth Defendant)

File Number(s):

2021/00245787

Publication restriction:

Nil

JUDGMENT

INTRODUCTION

1. In these representative proceedings, each of the defendants, Fogo Brazilia Holdings Pty Ltd, Ian David Dresner, Hilton Seskin and Lazarus Legal Group Pty Ltd, has applied for security for costs to be provided by the two lead plaintiffs, Laith & Fadi Investments Pty Ltd and Laith Karim Hana and a stay of the proceedings until such security is paid.

2. The substantive dispute in the representative proceedings involves a class action in which the lead plaintiffs claim relief against the defendants on behalf of Group Members who purchased rights to operate fast food restaurants as part of a franchise known as the ‘Fogo Brazilia Churrasco Grill’ (FBCG franchise). FBCG franchise restaurants operated in shopping mall food courts and sold Brazilian style churrasco grilled meat and associated products. The franchisor, Fogo Brazilia Franchise Holdings Pty Ltd, is in liquidation.

3. The lead plaintiffs operated an FBCG franchise in Wetherill Park, New South Wales.

4. The lead plaintiffs — Laith & Fadi as representative for all Group Members who, as franchisees, each entered into a standard form franchise agreement with the franchisor (Franchisee Group Members) and Mr Hana as representative for all directors of the Franchisee Group Members and all guarantors of the Franchisee Group Members’ obligations under the franchise agreements (Guarantor Group Members) — allege that the defendants should be held liable for:

1. engagement or involvement in misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law (ACL) contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (CCA) relating to information provided to the Franchisee Group Members in advance of them entering into the franchise agreements with the franchisor;

2. engagement or involvement in contraventions of various Franchising Codes within the meaning of ss 51AD and 51ACB of the CCA;

3. unconscionable conduct within the meaning of s 21 of the ACL by their involvement in the franchisor soliciting payments from the Franchisee Group Members for rights and assets which the defendants knew could not be granted;

4. breaches of the solicitors’ duty of care against Lazarus Legal (who are also the solicitors for Fogo Brazilia and Mr Dresner in these proceedings); and

5. engaging in misleading or deceptive conduct in contravention of s 18 of the ACL by Mr Dresner and Fogo Brazilia causing payments to be made by the Franchisee Group Members into an account that did not belong to the franchisor.

5. The lead plaintiffs claim damages or compensation against all of the defendants pursuant to ss 236 and/or 243 of the ACL and ss 82 and/or 87 of the CCA and damages at general law against Lazarus Legal.

6. The amount of security which is sought against the lead plaintiffs by the defendants to the end of the trial differs: Fogo Brazilia and Mr Dresner together seek an amount of $1,625,593.72, Mr Seskin seeks an amount of $956,000 and Lazarus Legal seeks an amount of $887,591.

7. At the hearing, I made an order that the evidence in each motion formed part of the evidence in respect of all of the defendants’ motions.

8. Mr N Li appeared for the lead plaintiffs instructed by Levitt Robinson, Mr A Vial appeared for Fogo Brazilia and Mr Dresner instructed by Lazarus Legal, Mr S Sykes appeared for Mr Seskin instructed by APA Lawyers and Ms T Epstein appeared for Lazarus Legal instructed by Sparke Helmore.

9. For the reasons set out below, I have determined that the lead plaintiffs should provide security for costs to each of the defendants in differing amounts payable in tranches and that there should be a stay of the proceedings if they fail to do so by the date on which each tranche is payable.

RELEVANT FACTS

Brief procedural history of the proceedings

10. In August 2021, the lead plaintiffs commenced the representative proceedings by summons filed 27 August 2021. On 9 September 2021, the lead plaintiffs filed the commercial list statement setting out their claims across 122 pages. The claims are wide ranging, extensive and factually dense.

11. On 6 July 2022, Lazarus Legal filed its list response. On 27 July 2022, Fogo Brasilia and Mr Dresner filed their list response. On 3 August 2022, Mr Seskin filed his list response. In essence, all of the defendants deny the claims made against them.

12. The lead plaintiffs have filed a reply to each of the list responses as follows: on 23 September 2022, a reply to the list response of Mr Seskin; on 11 October 2022, a reply to the list response of Lazarus Legal; and on 12 December 2022, a reply to the list response of Fogo Brasilia and Mr Dresner.

13. On 26 October 2022, Lazarus Legal filed an amended list response.

14. On 14 May 2024, the lead plaintiffs provided the defendants with a proposed amended commercial list statement in which it has removed all breach of duty of care claims against Lazarus Legal. The proposed amended commercial list statement has not yet been filed.

15. The lead plaintiffs have served extensive lay and expert evidence and an opt-out notice has been issued. After the determination of the applications before me, the next step in the proceedings is the service of the defendants’ lay and expert evidence. The proceedings have not yet been set down for trial.

16. The opt out notice refers to 17 franchises (including the franchise of Laith & Fadi). There are two lead plaintiffs and, without double counting one of the Franchisee Group Members who is also one of the Guarantor Group Members (Abu Syeed), there are 48 corporate and individual Group Members in total, 16 of which are corporations. In essence, it is a closed group.

Funding arrangements

17. In March 2018, the lead plaintiffs and their solicitors, Levitt Robinson, among others, entered into a Funding Agreement with Galactic Fogo Litigation LLC, a United States-based international litigation funder, to provide funding for the costs of the proceedings, including the provision of any security for costs ordered. Among the terms of the Funding Agreement relevant to this application is the following:

6.    REPAYMENT

6.1   The Parties agree that, to the extent possible, the Final Amount… subject to Court approval, [is] to be paid and applied in accordance with Clause 6.2…

6.2   Subject to Clauses 3 and 4 and, if there is a settlement of the Proceedings which receives Court approval, if required, on or by the Repayment Date, the Representatives will, to the extent possible, apply the Final Amount (or any part of it) and any other amount which is received by the Clients or any Funding Group Member in the Proceedings as follows:

6.2.1   First – in payment of any professional costs and disbursements reasonably incurred by or on behalf of the Representatives through the provision of legal services to the Clients in connection with the Proceedings, in excess of the Funding;

6.2.2   Second – in repayment to the Funder of an amount equivalent to the Funding;

6.2.3   Third – in payment to the Funder of [redacted] of the Final Amount, unless the matter settles within fourteen (14) days of the date of this Agreement, or before the Funder has outlaid or incurred a liability for Legal Costs of [redacted] pursuant to this Agreement, in which case the Funder shall only be entitled to receive [redacted] of the Final Amount;

6.2.4   Fourth – in payment of any amount properly due to a Lead Applicant if a Lead Applicant has been appointed to represent the Clients as Group Members in the Proceedings;

6.2.5   Fifth – in payment of the balance to the Clients.

…

Previous security

18. On 14 March 2022, Hammerschlag CJ in Eq ordered by consent that the lead plaintiffs pay into court security for the costs of Fogo Brasilia and Mr Dresner up to the close of pleadings in the amount of $110,000 by 18 March 2022. On 23 March 2022, that security was paid into court.

19. On 22 March 2022, Hammerschlag CJ in Eq ordered by consent that the lead plaintiffs pay into court security for the costs of Lazarus Legal in the amount of $20,000 by 25 March 2022. In April 2022, that security was paid into court.

20. On 16 June 2022, the lead plaintiffs agreed to pay $50,000 into court as security for the costs of Mr Seskin up to the close of pleadings. On 24 June 2022, that security was paid into court.

21. In each case it was conceded by the lead plaintiffs that security should be provided in light of the provisions of the Funding Agreement.

Correspondence and application concerning further security for costs for Fogo Brazilia and Mr Dresner

22. On 21 July 2022 Lazarus Legal (in their capacity as the solicitors for Fogo Brazilia and Mr Dresner) sent a letter to Levitt Robinson stating that Fogo Brazilia and Mr Dresner had incurred costs beyond $110,000 in the estimated amount of $286,854.67, that they intended to seek further security of $683,000 for their costs up to the close of evidence and inviting the lead plaintiffs to consent to the provision of further security in that amount. In the letter, Lazarus Legal also requested confirmation within 14 days that the Funding Agreement remained on foot and had not been superseded, varied, or otherwise modified in any way or terminated.

23. On 9 August 2023, Lazarus Legal sent a further letter to Levitt Robinson noting that there had been no response to their letter of 21 July 2022, repeating their request for the lead plaintiffs to confirm matters relating to the Funding Agreement and advising that, if no response was received and after filing a motion seeking further security for costs, Fogo Brazilia and Mr Dresner would issue notices to produce and subpoenas to the lead plaintiffs to obtain any funding agreement of which the lead plaintiffs were beneficiaries.

24. On 23 August 2023, Levitt Robinson sent a letter to Lazarus Legal responding to their letters of 21 July 2022 and 9 August 2023, confirming that the Funding Agreement remained current and that Galactic remained responsible for funding the representative proceedings.

25. On 25 August 2023, Levitt Robinson sent a further letter to Lazarus Legal accepting that an additional amount should be paid into court as security for the costs of Fogo Brazilia and Mr Dresner, but contesting the proposed quantum of $683,000. Levitt Robinson referred to Lazarus Legal’s incurred costs of $286,854.67, stating that no explanation was provided as to how such costs were incurred and to what aspects of the representative proceedings they related. Further, Levitt Robinson disputed the basis of Lazarus Legal’s estimate of their future costs, stating that the estimated costs for responding to lay and expert evidence may be overstated and were based on conjecture, as the lead plaintiffs’ evidence had not yet been served and no order for the provision of expert evidence had been made.

26. On 29 November 2023, Levitt Robinson sent a letter to Lazarus Legal setting out their estimate that the costs likely to be incurred by Fogo Brazilia and Mr Dresner from that point in the representative proceedings onwards was approximately $576,666 and the basis on which that amount had been calculated. The letter concluded by stating that the lead plaintiffs did not presently accept that they were required to provide further security in respect of costs incurred up to the close of pleadings.

27. On 12 February 2024, Fogo Brazilia and Mr Dresner filed the notice of motion seeking security for their costs in the amount of $1,625,593.72. This is one of the applications that I am to determine.

Correspondence and application concerning further security for costs for Mr Seskin

28. On 23 August 2023, APA Lawyers (the solicitors for Mr Seskin) sent a letter to Levitt Robinson stating that Mr Seskin’s actual costs and disbursements to the close of pleadings were $147,699.68, which exceeded the security for costs of $50,000 paid into court by $97,699.68 and, after an allowance of a reduction of 33% to estimate party/party costs, the shortfall in security was $48,958.78. APA Lawyers also stated that Mr Seskin had incurred additional costs of $83,972.63 since the close of pleadings up to 31 July 2023 and that the costs of Mr Seskin to 31 July 2023 after the close of pleadings, less an amount of 33% to estimate party/party costs, were $56,261.66. APA Lawyers stated that they intended to apply for further security in relation to Mr Seskin’s costs to the end of the trial and that they would file that application if Mr Seskin’s claim for security could not be resolved. The letter concluded with APA Lawyers asking for confirmation that the lead plaintiffs would provide additional security of $105,220.44, being the total of the party/party costs estimated for Mr Seskin’s costs up to 31 July 2023 in addition to the $50,000 already paid into court by the lead plaintiffs.

29. On 29 November 2023, Levitt Robinson sent a letter to APA Lawyers responding to their letter of 23 August 2023. Levitt Robinson stated that they estimated that the costs likely to be incurred by Mr Seskin from that point onwards were approximately $459,415 and set out the basis for the calculation. Levitt Robinson stated that on the basis that 70% of the incurred costs would be allowed on assessment, this amount would reduce to $321,591.

30. On 18 December 2023, APA Lawyers sent a letter to Levitt Robinson setting out their calculations of Mr Seskin’s costs to the close of pleadings ($147,699.38, with a 33% reduction to $98,958.78), the costs from the close of pleadings to 31 July 2023 ($83,972.63, with a 33% reduction to $56,261.66) and Mr Seskin’s costs from 1 August 2023 up to and including the final hearing of the proceedings ($1,269,935, with a 33% reduction to $850,856.45). The letter concluded by requesting that the lead plaintiffs consent to providing further security in the amount of $956,000 (including GST), failing which an application for further security would be made.

31. On 12 February 2024, Mr Seskin filed the notice of motion seeking security for his costs in the amount of $956,000. This is another of the applications I am to determine.

Correspondence and application concerning further security for costs for Lazarus Legal

32. On 30 August 2023, Spark Helmore (the solicitors for Lazarus Legal) sent a letter to Levitt Robinson stating that the costs incurred by Lazarus Legal in the proceedings exceeded the amount originally anticipated, with Lazarus Legal having incurred costs and disbursements of approximately $90,000 to date. The letter then set out the calculation of the further costs and disbursements that Lazarus Legal would incur in defending the proceedings to the conclusion of the trial of approximately $1,072,500. Spark Helmore stated that in an endeavour to avoid dispute over the quantum of security to be provided, they were instructed to accept further security on the basis of 70% of the estimated future costs, which was $750,750. They concluded by stating that if the amount of the further security could not be agreed then an application to court would be made.

33. On 29 November 2023, Levitt Robinson sent a letter to Spark Helmore responding to their letter of 30 August 2023. Levitt Robinson stated that their estimate of the costs likely to be incurred by Lazarus Legal was the amount of $470,166 and that on the basis of 70% of incurred costs would be allowable on assessment, that amount would reduce to $329,116.

34. On 30 November 2023 at 11:04am, Spark Helmore sent an email to Levitt Robinson stating that they would consider their letter and seek instructions and asking whether they should tell Lazarus Legal that the letter from Levitt Robinson constituted an offer to provide security in the sums mentioned.

35. On 30 November 2023 at 12:54pm, Levitt Robinson sent an email to Spark Helmore stating that their letter was not an offer and had invited confirmation from Lazarus Legal as to its position on the extent to which it would be inappropriate for some of the costs already incurred to be taken into account for the security for costs.

32. On 12 February 2024, Lazarus Legal filed the notice of motion seeking security for its costs in the amount of $989,564.74.

33. On 19 April 2024, Lazarus Legal filed the amended notice of motion seeking security for its costs in the amount of $887,591. This is the last of the applications I am to determine.

Galactic’s termination of the Funding Agreement

38. On 22 April 2024, Galactic sent a letter to Levitt Robinson referring to an email Levitt Robinson had sent to Galactic on 12 April 2024 (defined as “Your Email”) which evidently attached copies of those parts of the correspondence between the parties outlined above whereby the plaintiffs offered to pay certain sums of money by way of security for the defendants’ costs. By that letter, Galactic terminated the Funding Agreement, relevantly stating:

Breaches of the Funding Agreement

7.   Your clients and/or your firm have breached the Funding Agreement in material respects. We set out under the headings below the conduct that constitutes the breaches. The breaches are constituted by:

a.   failure to seek our instructions; and

b.    failure to provide us with the necessary information in respect of the conduct of the proceedings so that we would be in a position to provide your firm with instructions.

A.    Offers made to the defendants to pay security for costs

8.   Attached to Your Email was a copy of seven letters. Six of those letters (three of which were open and three of which are without prejudice) contained offers to the defendants to pay certain sums of money in tranches by way of security for costs (Letters). The collective total of the offers is $1,334,091.00. You proposed that consent orders be made to give effect to the agreement (assuming it is acceptable to the defendants).

9.   The Letters, which included offers, were sent without our knowledge or consent, in breach of clause 11.1 or alternatively clauses 11.3, 13.1 and 13.3 of the Funding Agreement. We assume that your clients provided you with instructions to send the Letters.

10.   Further, it is surprising that the Letters were sent in circumstances where only the day before, on 11 April 2024 at 10:35 am, we received an email from Blaise which inter alia said "We consider that the Plaintiffs ought to write to the Defendants with an explicit offer to pay security in tranches, including making an offer in respect of security for costs already incurred. I will write to you separately with some proposed correspondence”. We did not receive any "proposed correspondence", only the Letters, which had already been sent at the time they were provided to us.

B.   Notices to Produce

11.   On 28 March 2024 at 5:11 pm, we received an email from Blaise which inter alia (a) informed us that notices to produce had been issued; and (a) providing us with a copy of the notices (28 March Email). The letters to the defendants’ solicitors enclosing the notices is dated 27 March 2024, a day before we received a copy of them.

12.   The notices to produce were sent without our knowledge or consent, in breach of clause 11.1 or alternatively clauses 11.3, 13.1 and 13.3 of the Funding Agreement. We assume that your clients provided you with instructions to send the Letters.

C.   Amending the Commercial List Statement

13.   The 28 March Email also attached a letter from your firm to the fourth defendant's solicitor, Sparke Helmore (SP Letter).

14.   The SP Letter inter alia notifies the fourth defendant's solicitor that:

a.   the plaintiffs no longer press certain particulars in the second sub-paragraph sub-joined to paragraph 550 of their Commercial List Statement filed 9 September 2021 (CLS); and

b.   the plaintiffs no longer seek to press paragraphs 445 to 484 of the CLS.

15.   The SP Letter was sent without our knowledge or consent. The proposed amendments to the CLS were made without our knowledge or consent. This is a breach of clause 11.1 or alternatively clauses 11.3, 13.1 and 13.3 of the Funding Agreement. We assume that your clients provided you with instructions to send the Letters.

…

39. During the hearing, the lead plaintiffs accepted that Galactic’s termination of the Funding Agreement was not brought about by any conduct on the part of the defendants (T57).

40. From an email dated 18 September 2024 from David Purcell of Litigation Funding Solutions (a broker of litigation funding) to Mr Rappaport of Levitt Robinson, it would appear that Galactic may have asserted an ongoing right to receive a benefit should the lead plaintiffs succeed in these proceedings.

Financial position of the lead plaintiffs

41. Until the Funding Agreement was terminated, the lead plaintiffs were not contesting that it was appropriate that further security be ordered in favour of the defendants but only put in issue the quantum of that further security. The position of the lead plaintiffs changed with the termination of the Funding Agreement, as the costs of the lead plaintiffs in these proceedings are no longer funded by Galactic. As I have outlined in more detail below, the lead plaintiffs now argue that the proceedings will be stultified if they are ordered to provide security by reason of their inability to pay.

42. Relevant to the question of the funding of the lead plaintiffs’ costs, at the hearing, the defendants made a concession — limited to their respective security for costs motions — that they would not submit that the lead plaintiffs failed to discharge their onus with respect to obtaining funding from an external third party litigation funder (T17.15–26). Accordingly, it is not necessary for me to consider the attempts made by the lead plaintiffs to obtain any further litigation funding after the termination of the Funding Agreement.

43. It is, however, necessary to determine the financial position of the lead plaintiffs, those persons standing behind them and the Group Members.

Laith & Fadi

44. Company searches of Laith & Fadi establish that it has paid-up capital of $2 with two shareholders and directors, being Mr Hana and Fadi James Youssef. A property search of Laith & Fadi reveals that it has no property interests in Australia.

45. It is common ground that Laith & Fadi is impecunious, is not trading and remains incorporated for the sole purpose of prosecuting these representative proceedings.

Mr Hana and entitles owned by him

Income and expenses

46. The notice of assessment issued by the Australian Taxation Office for Mr Hana for the year ending 30 June 2023 shows that his taxable income was $111,375, his assessed tax payable was $26,553.87 and, after the deduction of PAYG withholding tax already paid, he was liable to pay $488.55 in income tax by 22 April 2024.

47. Mr Hana currently receives income from the following two management companies:

1. Paramount Building & Development Pty Ltd, of which he is one of two directors and a 50% shareholder, who paid him a salary of $54,999 in 2023; and

2. House of Finance Aus Pty Ltd, of which he is the sole director and shareholder, who paid him a salary of $64,896 in 2023.

48. The total of these income amounts is $119,895 per annum, which is $9,991.25 per month. Mr Hana says that he has never received any dividends from Paramount Building or House of Finance Aus.

49. According to Mr Hana, his monthly living expenses are $8,500 and monthly mortgage repayments are $5,030, totalling $13,530 per month or $162,360 per annum. Based on Mr Hana’s income for 2023 of $119,895, he is spending more per month and per annum than he receives in income.

50. Mr Hana says Paramount Building runs at a loss and that his shares are of negligible or no value. No further financial information about Paramount Building was provided at the hearing.

51. Mr Hana is also one of two directors and a 50% shareholder of House of Finance Group Pty Ltd which carries on a finance brokerage business. House of Finance Group derives commission income from each loan it originates, with the commission income split into an upfront commission payable on the first drawdown of the loan and trail commission payable as a percentage of the outstanding balance of the loan for its life until it is repaid or refinanced. For the year ended 2023, House of Finance Group earned $1.9 million in upfront commission income and trail commission income of about $700,000.

52. Mr Hana says that the trail commissions are not able to be sold without the unanimous consent of the other director and shareholder of House of Finance Group, who does not currently consent.

53. House of Finance Aus receives approximately $1 million revenue per annum or $83,333 per month from House of Finance Group for management fees, which is its only source of income.

54. The monthly expenses of House of Finance Aus total between approximately $47,750 and $63,250, giving House of Finance Aus a net surplus of between approximately $25,083 and $30,583 which is lent to Mr Hana and used by him to lend to various property development entities.

Assets

55. Mr Hana estimates his savings as being approximately $40,000.

56. According to property title searches, Mr Hana has engaged in the following property dealings in his own name between 2019 and 2024:

1. On 30 September 2019, Mr Hana purchased a property located at 40 Honeymyrtle Avenue, Denham Court, New South Wales, for $410,000. On 7 May 2021, Mr Hana sold 40 Honeymyrtle Avenue for $1,355,000 (generating an excess of $945,000). There is no evidence of what happened to this excess.

2. On 29 January 2021, Mr Hana purchased a property located in Wassell Street, Dundas, New South Wales for $1.15 million which was subdivided into two properties, being the first Wassell Street property and the second Wassell Street property respectively. On 15 March 2024, Mr Hana sold the second Wassell Street property for $1.8 million and the first Wassell Street property for $1.77 million (generating a total excess of $2.42 million). There is no evidence of what happened to this excess.

3. On 14 January 2022, Mr Hana purchased a property located in Wurmbea Way, Denham Court, New South Wales (first Wurmbea Way property). As at 12 June 2024, Mr Hana remained the registered proprietor of the first Wurmbea Way property.

4. On 14 January 2022, Mr Hana also purchased a second property located in Wurmbea Way, Denham Court, New South Wales (second Wurmbea Way property) for $502,000. On 11 June 2024, Mr Hana sold the second Wurmbea Way property for $1.73 million (generating an excess of $1,228,000). Mr Hana estimates that he will receive an amount of $125,000 from the sale of the second Wurmbea Way property, following payment of the outstanding mortgage, builder fees and capital gains tax.

57. The first Wurmbea Way property is currently desktop valued by Domain at $1.21 million and subject to a mortgage in the amount of $900,000. Mr Hana is the registered proprietor of the first Wurmbea Way property. Mr Hana says that his uncle contributed 50% of the purchase price and construction costs of the first Wurmbea Way property and has a beneficial interest in it. It would appear that Mr Hana is entitled to half of the proceeds if a sale of the first Wurmbea Way property ever occurs.

58. Mr Hana is also involved in seven property development projects that are each undertaken through the operation of special purpose vehicles (SPVs), where each of the SPVs purchase and manage development of the land.

59. Each of these SPVs are funded by investors, who contribute capital (up to 20%) in return for receiving units in the relevant SPV, and banks, who provide loans that are secured by the underlying assets of the relevant SPV. Investors are required to provide funds for any construction costs, whether they be contemplated at the outset or incurred afterwards — for example, where costs are overrun or disputed.

60. According to Mr Hana, calculating the value of the units in the SPVs is difficult because their value is subject to delays and increased costs of the property developments and ultimately depends upon their overall profitability. No evidence of the value of Mr Hana’s units in the SPVs was given.

61. Mr Hana says that the properties owned by each of the SPVs cannot be sold without the consent of their unitholders and, as a result, these investments are highly illiquid. Of the seven development projects, Mr Hana estimates that the SPV property closest to completion is at least another 12 months away.

62. Mr Hana says that the business of House of Finance Group could be valued at approximately 1.5 times its current trail revenue of $700,000, which is $1,050,000. Mr Hana says that the upfront commission would be wholly discounted when valuing the business of House of Finance Group, although no reason was put forward for explaining why this would be the case.

63. No expert evidence of the value of House of Finance Group or House of Finance Aus was provided by the lead plaintiffs.

64. House of Finance Aus has provided loans to Mr Hana in the sum of $2.2 million for his various property developments, which are not repayable until the developments are completed and sold.

65. As stated above, Mr Hana says that Paramount Building runs at a loss and that his shares in it are of negligible or no value.

Liabilities

66. By 2019, Mr Hana says that he discharged his debts in the amount of $100,000 that were incurred by him in connection with being a franchisor, being a personal loan of $21,000 and credit card debt.

67. Mr Hana estimates that he owes $2.2 million to House of Finance Aus.

68. House of Finance Aus has $260,000 in current liabilities for three motor vehicle loans and a credit card debt, requiring monthly repayments of $8,750 and $5,000 to $10,000 respectively.

Additional information

69. Mr Hana has one dependent who is 15 months of age.

70. According to Mr Hana, he would need to obtain a further loan of $50,000 from the House of Finance Aus to allow him to contribute money into court for the purpose of funding these proceedings.

Mrs Hana

71. For the financial year ending 30 June 2023, Katya Hana (Mr Hana’s wife) had a taxable income of $135,246, the sources of which were:

1. a $42,500 salary from House of Finance Group (which no longer employs her);

2. a $89,131 salary from the House of Finance Aus;

3. $428 in wages from Laser Clinics Australia (which no longer employs her); and

4. a $9,586 parental leave payment from Centrelink.

72. Mrs Hana is currently employed by House of Finance Aus for which she receives a salary of $130,000 per annum (excluding superannuation).

Financial position of the persons standing behind Laith & Fadi

Mr Hana

73. Mr Hana is not only one of the lead plaintiffs; he is also a person standing behind Laith & Fadi because he is one of the shareholders in it. His financial position as outlined above is therefore relevant to the financial position of Laith & Fadi.

Mr Youssef

74. The other shareholder of Laith & Fadi is Mr Youssef. No evidence has been provided of Mr Youssef’s financial position.

75. According to the evidence of Justin Reynolds, a solicitor employed by Levitt Robinson, he unsuccessfully attempted to telephone Mr Youssef on two occasions: an unspecified day before 3 June 2024 and on 12 September 2024.

Financial position of the Group Members

76. All of the material put before the court by the lead plaintiffs as evidence of the financial position of the Group Members was elicited by way of telephone calls between Justin Reynolds (a solicitor employed by Levitt Robinson) and each Group Member or a member of their family or an email sent by Mr Reynolds to a Group Member.

77. The defendants put in issue the weight that such evidence can be given, in light of the fact that the evidence has been expressed in the most general terms, the questions asked in each of the communications has not been disclosed, there is no direct evidence from any Group Member, there is no documentary evidence to support the assertions made about the financial position of the Group Members and the evidence does not permit the court to know the precise financial position of each of the Group Members. I agree that very little weight can attach to this evidence for the reasons given by the defendants.

78. To the extent that it can be discerned from the limited nature of the assertions contained in the evidence, the respective financial positions of the Group Members are as follows:

Abu Syeed and Nurzhat Tazeen Huq

79. Mr Syeed was the Merrylands franchisee and a director of NAS Enterprises (NSW) Pty Ltd, one of the three Liverpool New South Wales franchisees.

80. Ms Huq is the wife of Mr Syeed. Ms Huq is a director of NAS Enterprises (NSW) Pty Ltd.

81. NAS Enterprises (NSW) Pty Ltd no longer trades and has been deregistered.

82. Mr Syeed is an employee and 70% shareholder of OM Proprietors NSW Pty Ltd, but does not receive any income.

83. Mr Syeed jointly owns a property of unspecified value with Ms Huq and takes out loans leveraged against his equity, which he says is minimal, to pay his monthly expenses.

84. Mr Syeed owns an Audi Q5 (2015) with an estimated value of $25,000.

85. Mr Syeed and Ms Huq have one dependent child who is 12 years of age.

86. Mr Syeed indicated that he was unable to contribute any money for the continuation of these proceedings because to do so would cause an inability to meet his own debts and family expenses, and Ms Huq was unwilling to provide any information about her financial position to Levitt Robinson.

Mafizul Islam

87. Mr Islam is a director and guarantor of Golden Peak Australia Pty Ltd, the Bondi Junction New South Wales franchisee.

88. Golden Peak Australia Pty Ltd no longer trades.

89. Mr Islam receives a net income of $45,000 from his work as an Uber driver and owns two vehicles: a Toyota Rav 4 (2008) with an estimated value of $7,000 and a Toyota Camry (2014) with an estimated value of $8,000.

90. Mr Islam has two dependents who are 7 and 11 years of age respectively.

91. According to Mr Islam, he does not have any disposable income after meeting his expenses, the details of which were not provided.

Farhad Hossen

92. Mr Hossen is a director and guarantor of Golden Peak Australia Pty Ltd, the Bondi Junction New South Wales franchisee, and a director and guarantor of R&F Innovation Enterprise Pty Ltd, the Darling Harbour New South Wales franchisee.

93. As indicated above, Golden Peak Australia Pty Ltd no longer trades.

94. R&F Innovation Enterprise Pty Ltd generates an annual revenue of $100,000, has an existing credit card liability of $10,000 and provides Mr Hossen with an annual net income of $77,024.

95. Mr Hossen jointly owns a property with his wife valued at $1.3 million, encumbered by a mortgage of $1 million and is required to make monthly mortgage repayments of $6,000. During COVID-19, the mortgagee did not require Mr Hossen to make any mortgage repayments. Following the resumption of mortgage payments, Mr Hossen has needed financial assistance from his family and friends to meet these repayments, with a total amount owing of $70,000.

96. Mr Hossen owns two vehicles: a Mazda CX9, with an estimated value of $30,000, and a Honda Civic, with an estimated value of $4,000.

97. Mr Hossen has two dependents who are 2 and 11 years of age respectively. His wife does not work.

98. According to Mr Hossen, he does not have any disposable income after meeting his expenses and will not be able to contribute any money for the costs of these proceedings.

Luis Dominguez and Amelia Dominguez

99. Mr and Mrs Dominguez are the directors and guarantors of A&L Dominguez Pty Ltd, the Penrith New South Wales franchisee.

100. A&L Dominguez Pty Ltd does not trade and is dormant pending the outcome of these proceedings.

101. Mr Dominguez is currently employed at Westpac Banking Corporation and has a gross annual income of $205,000, excluding superannuation. Mrs Dominguez is currently employed at Commonwealth Bank of Australia and has a gross annual income of $155,000.

102. Mr and Mrs Dominguez jointly own a property valued at $1.7 million, encumbered by a mortgage of $1.324 million. They also jointly own a vehicle with an estimated value of $10,000, and $20,000 of shares in Westpac Banking Corporation.

99. Mr and Mrs Dominguez have three dependents who are 19 months, 4 years and 8 years of age respectively.

100. Mr and Mrs Dominguez have annual childcare expenses of $70,000 and a joint credit card liability of $10,000.

101. Separately, Mr Dominguez leases a Toyota Kruger valued at $70,000 and the same amount is outstanding on the lease. He also owns $3,000 of shares in Westpac Banking Corporation. Mrs Dominguez owns $3,000 of shares in Commonwealth Bank of Australia.

102. According to Mr Dominguez, he will not be able to contribute any money for the costs of these proceedings.

MD Mostafa Hassan and Mohammed Masum Rana

107. Mr Hassan and Mr Rana are former directors and guarantors of DOAA & JAWAD Pty Ltd, the Narellan New South Wales franchisee.

108. DOAA & JAWAD Pty Ltd has been deregistered.

109. Mr Hassan is currently employed by Qube Logistics and has an annual net income of $70,000.

110. Mr Hassan jointly owns a property with his wife valued at $900,000, encumbered by a mortgage of $550,000. His wife is a casual employee of Campbelltown Council, working two days a week.

111. Mr Hassan also owns two vehicles: a Kia Sportage (2022) valued at $22,000; and an MG (2022) valued at $15,000.

112. Mr Hassan has a credit card liability of $7,000, which he incurred in purchasing the MG.

113. Mr Hassan has three dependents and he says he is unable to contribute any money for the costs of these proceedings.

114. No financial information has been provided in relation to Mr Rana as he did not respond to the inquiries of Levitt Robinson.

Mahathi Jammula and Kamalakar Reddy Akavaram

115. Mrs Jammula and Mr Akavaram are directors of VSKM Pty Ltd, the Highpoint Victoria franchisee. They are married to each other.

116. VSKM Pty Ltd continues to trade.

117. Mrs Jammula is currently employed by VSKM Pty Ltd, has an annual net income of $50,000, owns a property of unspecified value, encumbered by a mortgage, and has equity in the property of $50,000.

118. Mr Akavaram is a director, 33.3% shareholder and employee of Asetron Private Limited Pty Ltd, receiving an annual net income of $70,000. He owns a property of unspecified value, encumbered by a mortgage, and has equity in the property of $100,000.

119. Mrs Jammula and Mr Akavaram have two dependents who are 7 and 11 years of age respectively.

120. According to Mrs Jammula and Mr Akavaram, they are each able to contribute $1,000 for the costs of these proceedings, being the total amount of Mrs Jammula’s monthly disposable income after expenses and twice the amount of Mr Akavaram’s monthly disposable income after expenses.

Sarika Mogili

121. Mrs Mogili is a former director of VSKM Pty Ltd, the Highpoint Victoria franchisee.

122. Mrs Mogili has no income, no assets, two dependents and her husband is responsible for their family’s monthly expenses. According to Mr Mogili, she will not be able to contribute any money for the costs of these proceedings.

Mohamed Abdel Moaty Elsayed Elmahrakawy

123. Mr Elmahrakawy is a director and guarantor of Melbourne United Group Pty Ltd, the Frankston Victoria franchisee.

124. Melbourne United Group Pty Ltd has ceased to trade and is deregistered.

125. Mr Elmahrakawy has no annual income, no assets of value, no dependents and is financially supported by family and friends. According to Mr Elmahrakawy, he cannot make any financial contribution to the costs of these proceedings.

Mohd Asaf Ud Dowla and Ishrak Hasnain

126. Mr Dowla and Mr Hasnain are directors of Swapno Pty Ltd, the Macarthur Square New South Wales franchisee.

127. Swapno Pty Ltd is no longer trading.

128. Mr Dowla is employed at an unnamed business and receives an annual net income of $80,000. He jointly owns two properties of unspecified value with his wife, encumbered by mortgages also of unspecified value, in which he says they have minimal equity and have recently refinanced to avoid bank foreclosures.

129. According to Mr Dowla, he has no disposable income after meeting his expenses.

130. Mr Dowla has two dependents: an adult child who is living with him at home and a sister who is living overseas.

131. Mr Hasnain receives an annual net income of $6,000 and has no assets or disposable income after meeting his expenses. He currently lives with his family in Bangladesh and has one dependent.

Taslima Begum

132. Ms Begum is a director of RRZ Pty Ltd, the Bankstown New South Wales franchisee.

133. Ms Begum does not receive any financial support from her former husband, Rafique Ahmed Khan, who now lives overseas. Ms Begum has one dependent who suffers from nervous shock. Ms Begum survives on Centrelink payments of an unstated value and received proceeds from the sale of her home (she is now renting) in the sum of $20,000, which were all applied to pay the lessor of her franchise.

134. According to Ms Begum, she cannot afford to contribute any money towards the costs of these proceedings.

Remaining Group Members

135. No evidence has been provided of the financial positions of the following remaining Group Members whom Levitt Robinson has attempted to contact but has been unsuccessful in doing so:

1. Rafique Ahmed Khan, a director of RRZ Pty Ltd, the Bankstown New South Wales franchisee;

2. Subrata Kumar Saha and Moli Saha, directors of Saha Enterprises Pty Ltd, one of two Rouse Hill New South Wales franchisees;

3. Saiful Kabir Sumon, Saidul Karim and Kazi Rakibul Alam, directors of Four Minds Pty Ltd, the Penrith New South Wales franchisee;

4. Mahmud Jawad Bin Rashid, director of Waseemu Pty Ltd, the Rhodes New South Wales franchisee;

5. Mostafizur Rahman and Tanmoy Sen, directors of RZ Group Pty Ltd, one of the three Liverpool New South Wales franchisees;

6. Touhidul Islam, director of Swapno Pty Ltd, the Macarthur Square New South Wales franchisee;

7. Mohammed Mahbubur Rahman, Nurul Islam Chowdhury and Towha Mohammad, directors and guarantors of Active Food and Beverage Pty Ltd, one of two Rouse Hill New South Wales franchisees; and

8. Sam Zakir Hussain Mazumder and Fahria Nusrat, directors and guarantors of Arvin Australia Pty Ltd, another one of the three Liverpool New South Wales franchisees.

136. There is no evidence about the financial position of 23 of the 48 Group Members.

137. No undertaking has been offered by any Group Member to pay the costs of the defendants in the event that these proceedings are unsuccessful.

Costs arrangements with Levitt Robinson

138. The lead plaintiffs relied on an affidavit sworn 15 May 2024 by Stewart Levitt (a partner of Levitt Robinson) (Levitt May affidavit) in which Mr Levitt deposed to the following matters:

1. Levitt Robinson continues to act and is prepared to continue to act for each of the lead plaintiffs and each Group Member that was a client of Levitt Robinson immediately prior to the termination of the Funding Agreement on 22 April 2024.

2. No client Group Member has communicated with Levitt Robinson any intention to terminate Levitt Robinson’s retainer with them.

3. Levitt Robinson proposes to charge on a speculative basis, subject to its disbursements being paid as and when they fall due.

4. Levitt Robinson has not yet prepared a draft conditional costs disclosure and costs agreement or circulated that to the lead plaintiffs or client Group Members for their consideration.

139. The lead plaintiffs also relied on an affidavit sworn 3 June 2024 by Mr Levitt (Levitt June affidavit) in which he deposed that he had personally paid the outstanding invoices of counsel for the lead plaintiffs since the termination of the Funding Agreement and has acknowledged liability to counsel for those unpaid invoices.

140. As at the time of the Levitt May affidavit, no conditional costs disclosure and costs agreement had been prepared or circulated by Levitt Robinson to the lead plaintiffs and Group Members. Exhibited to the Levitt June affidavit there was what was described as “a copy of the executed Conditional Costs Agreement dated 31 May 2024”. But the Conditional Costs Agreement which is exhibited to the Levitt June affidavit was only signed by Mr Levitt on behalf of Levitt Robinson alone on 3 June 2024 and is not signed by any of the lead plaintiffs or Group Members. There is no evidence that the Conditional Costs Agreement has been circulated to the lead plaintiffs and the Group Members for their consideration, even less that they have agreed to it. There is also no evidence of what (if any) arrangements were in place for the retainer of Levitt Robinson by the lead plaintiffs or Group Members at any time prior to the Conditional Costs Agreement.

141. In light of this evidence, I cannot make any finding that the lead plaintiffs or the Group Members have entered into the Conditional Costs Agreement with Levitt Robinson. In any event, it would appear from the Levitt May affidavit that Levitt Robinson do not act for all of the Group Members, referring to the Group Members who were clients of Levitt Robinson immediately before the termination of the Funding Agreement as “client group members”.

142. The lack of clarity in the evidence regarding the basis on which Levitt Robinson has been and is acting in the proceedings is troubling and prevents me from finding that it is accepted by the lead plaintiffs and the Group Members that Levitt Robinson will be acting on a speculative basis.

143. If I am wrong about that finding, then there are particular terms in the Conditional Costs Agreement which are relevant to the determination of these applications.

144. First, the Conditional Costs Agreement contains the following provisions in relation to the charging of professional fees, internal expenses and disbursements:

B.   SUCCESSFUL OUTCOME OF THE MATTER

We will only be entitled to receive payment for our professional fees and internal expenses from you in the event that you obtain a successful outcome in this matter. The successful outcome of the matter, as agreed with you, is a verdict, judgment, settlement, financial recovery, non-monetary compensation or any other arrangement entitling you to any relief, remedy or benefit, including by way of negotiation, mediation or court process. In the event that you accept an offer, made by or on behalf of the other party, for compensation of your claims or any non-monetary compensation or otherwise elect not to maintain this matter or fail to do so, or if you or we terminate this Conditional Costs Agreement in accordance with its terms, our legal costs will become immediately due and payable notwithstanding any clause to the contrary.

We will ask you to pay us, in advance, an amount to enable payment of our disbursements to complete the various stages of your matter.

Notwithstanding any clause to the contrary, in the event that we, in our absolute sole discretion, pay a disbursement without securing the disbursement amount in trust and/or do not invoice you for, or pass onto to [sic] you, the disbursement prior to the successful outcome of this matter, the disbursement will form part of our legal costs under this Agreement.

…

D.   DISBURSEMENTS AND ADMINISTRATIVE EXPENSES

Disbursements

1.   We will either charge you or pass on to you for payment, within thirty (30) days of invoice, all out-of-pocket expenses which we may incur. This could include… barristers’ fees, courier and filing fees, postage and other delivery charges, searches and travelling costs where applicable. You authorise us to pay from trust monies held on your behalf, expenses which we have incurred for your benefit or to reimburse ourselves for such outlays in advance of our accounting to you.

2.   We will request from you payment in advance of an amount sufficient to cover our reasonably anticipated disbursements and you will meet that request within fourteen (14) days of receipt by paying the request sum into our trust account.

…

145. The Conditional Costs Agreement also contains provision for the charging of “Administrative Expenses” which are described as charges for photocopying, facsimiles, telephone charges and law stationer’s fees at specified rates, along with costs incurred for the recovery of files from outside storage. I interpret these to be the “internal expenses” to which reference is made in section B of the Conditional Costs Agreement.

146. In the Conditional Costs Agreement, professional fees are estimated to be $600,000 (with no uplift), disbursements are estimated to be $300,000 and administrative expenses are estimated to be $10,000 (all amounts excluding GST).

147. Accordingly, if the Conditional Costs Agreement is in operation, whether or not there is a successful outcome of these proceedings for the lead plaintiffs and Group Members, they will be liable to pay Levitt Robinson for disbursements which are incurred, either payable 14 days in advance or 30 days after they are invoiced, estimated to be $300,000.

After the event insurance

148. The lead plaintiffs also relied on evidence that through Levitt Robinson unsuccessful attempts have been made to obtain after the event insurance (ATE insurance) to insure the lead plaintiffs against any adverse costs orders in the proceedings. The evidence demonstrated the following:

1. On 31 July 2024, Levitt Robinson submitted a draft application for ATE insurance to James Walker, an insurance broker from JMD Ross Insurance Brokers Pty Ltd (a copy of which is not in evidence).

2. On 14 August 2024, Levitt Robinson submitted a final draft proposal form to Mr Walker (a copy of which is not in evidence).

3. On 19 August 2024, Levitt Robinson submitted an executed application and proposal form to Mr Walker (a copy of which is not in evidence).

4. On 4 September 2024, during a telephone call with Levitt Robinson, Mr Walker said words to the effect that none of the underwriters on his panel were interested in the application or inclined to offer any policy for the risk.

5. On 19 September 2024, Mr Walker sent Levitt Robinson emails dated 27 and 29 August 2024 and 4 September 2024 from different underwriters declining to offer ATE insurance.

149. There is evidence that a rough estimate of the minimum non-refundable portion of the ATE insurance premium for the lead plaintiffs in these proceedings would be $270,000.

150. In the course of oral submissions, Mr Seskin submitted that I should give limited weight to the evidence of the prospects of the lead plaintiffs obtaining ATE insurance, and that the lead plaintiffs did not meet the onus of establishing that ATE insurance is not available to them (T38–39). I do not agree. Although I do not have all of the documents relevant to the applications made for ATE insurance by Mr Walker on behalf of the lead plaintiffs, I am satisfied that the lead plaintiffs have demonstrated that the prospect of them obtaining ATE insurance in these proceedings is remote.

ISSUE 1: WHETHER TO MAKE AN ORDER FOR SECURITY FOR COSTS

Legal principles

151. There are multiples bases on which the court has jurisdiction to award security for costs in proceedings before it, arising from particular statutory provisions and the inherent jurisdiction of the court.

152. Rule 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) relevantly states:

42.21   Security for costs

(1)   If, in any proceedings, it appears to the court on the application of a defendant—

…

(d)   that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or

(e)   that a plaintiff is suing, not for his or her own benefit, but for the benefit of some other person and there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so, …

…

the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant’s costs of the proceedings and that the proceedings be stayed until the security is given.

(1A)   In determining whether it is appropriate to make an order that a plaintiff referred to in subrule (1) give security for costs, the court may have regard to the following matters and such other matters as it considers relevant—

(a)   the prospects of success or merits of the proceedings,

(b)   the genuineness of the proceedings,

(c)   the impecuniosity of the plaintiff,

(d)   whether the plaintiff’s impecuniosity is attributable to the defendant’s conduct,

(e)   whether the plaintiff is effectively in the position of a defendant,

(f)   whether an order for security for costs would stifle the proceedings,

(g)   whether the proceedings involves a matter of public importance,

(h)   whether there has been an admission or payment in court,

(i)   whether delay by the plaintiff in commencing the proceedings has prejudiced the defendant,

(j)   the costs of the proceedings,

(k)   whether the security sought is proportionate to the importance and complexity of the subject matter in dispute,

(l)   the timing of the application for security for costs,

(m)   whether an order for costs made against the plaintiff would be enforceable within Australia,

(n)   the ease and convenience or otherwise of enforcing a New South Wales court judgment or order in the country of a non-resident plaintiff.

(1B)   If the plaintiff is a natural person, an order for security for costs cannot be made merely on account of his or her impecuniosity.

(2)   Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct.

(3)   If the plaintiff fails to comply with an order under this rule, the court may order that the proceeding on the plaintiff’s claim for relief in the proceedings be dismissed.

(4)   This rule does not affect the provisions of any Act under which the court may require security for costs to be given.

153. Section 1335 of the Corporations Act2001 (Cth) also confers a power to order security for costs in circumstances where a corporation is a plaintiff, relevantly providing as follows:

(1)   Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

…

(2)   The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs.

154. A further source of power to award security for costs is contained in s 67 of the Civil Procedure Act2005 (NSW) (CPA) which provides:

Subject to rules of court, the court may at any time and from time to time, by order, stay any proceedings before it, either permanently or until a specified day.

155. The court may, for example, make an order pursuant to s 67 that proceedings before it be stayed until security for costs is given. In De Jong v Carnival PLC [2016] NSWSC 347, in relation to s 67 of the CPA as a source of implied power to award security for costs in representative proceedings, Beech-Jones J at [45] said the following:

The second source is s 67 of the CPA, which confers on the Court a power, subject to the rules, to order a stay of any proceedings either permanently or until a specified date. In Philips Electronics Australia Pty Ltd v Matthews [2002] NSWCA 157; 54 NSWLR 598 at [47] (“Philips Electronics”), Hodgson JA held that the former s 156 of the District Court Act 1973 (NSW) conferred on the District Court a power to make an order staying proceedings unless and until security for costs was given. His Honour held that the power was not limited by the District Court Rules which specified circumstances in which it was appropriate to make such an order against an individual (at [50] to [52]). However, his Honour added (at [53]) that the existence of such rules meant that a “strong case” would need to be made out that it was necessary in the interests of justice to stay proceedings until security for costs was provided, although it was not necessary to demonstrate that the proceedings were an abuse of process (at [47]). Mason P agreed with Hodgson JA and stated that the circumstances in which the power to order a stay conditional upon the grant of security in categories falling outside those prescribed by the rule would be exercised were “exceptional” (at [13]).

156. The court also has an inherent jurisdiction to order security for costs. In De Jong, Beech-Jones J at [48] described the inherent jurisdiction in the following way:

The third is the “inherent jurisdiction of the Supreme Court to make orders for security for costs” in circumstances other than those prescribed by the rules (Philips Electronics at [52] per Hodgson JA; Green at [33] per Hodgson JA, Campbell JA agreeing; Charara v Integrex Pty Ltd [2010] NSWCA 342 at [15] per McColl JA; Byrnes at [17] per Simpson J; Rajski v Computer Manufacture & Design Pty Ltd [1982] 2 NSWLR 443 at 447). In Green at [45] Hodgson JA specifically instanced a plaintiff “bring[ing] a case for the benefit of others (albeit not solely for their benefit as apparently required by UCPR 42.21(1)(e))” as a circumstance that would warrant this Court exercising its inherent power to award security for costs. Further, his Honour stated the following concerning the principles that govern the exercise of this power (Green at [46]):

In my opinion, it would be an oversimplification to say that underlying these guidelines is a broader principle that defendants should be protected against being unable to collect costs ordered against plaintiffs unless this would stultify the litigation. Certainly, these are relevant considerations; but in my opinion also relevant are the considerations that there should not be undue inhibitions on less wealthy persons from seeking vindication of their rights against more wealthy persons, and that there could be such inhibitions if it was in every case open to defendants to apply for security for costs on the basis of some evidence (or even on the basis of fishing notices to produce) suggesting inability to pay costs, and to claim that security should be given unless the plaintiff can prove it would stultify the litigation. In my opinion these considerations make it desirable that guidelines be adhered to, even though the question is ultimately for the court’s discretion. (emphasis added)

157. Section 181 of the CPA prevents the court from awarding costs against a group member other than a representative party and is in the following terms:

Despite section 98, in any representative proceedings, the Court may not award costs against a person on whose behalf the proceedings have been commenced (other than a representative party) except as authorised by ss 168 and 169.

158. In summary, s 98 of the CPA gives the court the power to determine who should pay the costs of any proceedings and the amount of those costs.

159. Section 168 of the CPA concerns the determination of questions which are not common to all group members, which is not relevant to the determination of the present applications.

160. Section 169 of the CPA concerns the liability of an individual group member for the costs associated with the determination of a question which only relates to the claims of that member. That provision is also not relevant to the determination of these applications.

161. In De Jong, Beech-Jones J at [6] summarised the position of a court ordering security for costs in representative proceedings in the following way:

For the reasons that follow, I conclude that this Court has the power to order security for costs against the representative party in representative proceedings, but not against group members. I also find that it can stay the proceedings in the event that security is not provided, although the Court might order that the proceedings no longer continue as representative proceedings before ordering a stay. The power to order security for costs is to be exercised in the manner stated by Carr J in Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317 (“Bray”) at [141] namely by balancing the policy reflected in s 181 of the CPA against the risk of injustice to a defendant. In circumstances where the representative party is impecunious, but is neither suing on behalf of a person with assets who seeks to avoid a costs liability nor supported by an external funder, then a determination of whether security will be ordered and, in particular, whether an order for security will stifle the proceedings requires that consideration be given to the financial circumstances of group members. If a reasonably strong case for security is made out then it may, and often will, be appropriate to ascertain the capacity and willingness of group members to contribute to a fund to meet any order for security that is made against the representative party.

162. In De Jong, Beech-Jones J at [51]–[53] accepted that s 181 of the CPA operates so that no order for security for costs can be made against a group member, but rejected the argument that s 181 of the CPA means that no order for security can be made against a representative party, which his Honour said “is not supported by any of the text of s 183 [which gives the court power to make any order that the court thinks appropriate or necessary to ensure that justice is done in the proceedings], the structure of the CPA as a whole or relevant authority.” I agree.

163. As repeated in De Jong by Beech-Jones J at [24], the longstanding general rule is that security will not be ordered against a natural person solely on the grounds of their impecuniosity, subject to an exception arising where an impecunious plaintiff sues for the benefit of others.

164. In De Jong, Beech-Jones J at [24]–[27] analysed the authorities concerning the equivalent provisions of r 42.21 of the UCPR and s 181 of the CPA in ss 56 and 43(1A) of the Federal Court of Australia Act 1976 (Cth) (FCAA), delineating at [26] the following five propositions applicable to representative proceedings arising from the decisions of the Full Court of the Federal Court in Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317; [2003] FCAFC 153 and Madgwick v Kelly (2013) 212 FCR 1; [2013] FCAFC 61 (citations omitted):

1. An order for security against the representative party does not affect the immunity conferred by s 43(1A) of the FCAA.

2. The fact that an impecunious plaintiff brings proceedings for the benefit of represented persons may be a significant factor in favour of an order for security.

3. To obtain an order for security it is not necessary to demonstrate that the representative party had been deliberately selected to shield group members with substantial means for whose benefit the proceedings were brought.

4. The party resisting security on the basis that it will stultify the proceedings bears the onus of proof of that fact.

5. The financial circumstances of group members are relevant to an application for security, especially the contention that an order for security would stultify the proceedings.

165. In Bray, Carr J (with whom Branson and Finkelstein JJ agreed or substantially agreed) at [141] canvassed the balancing of the policy in s 43(1A) of the FCAA that in representative proceedings the group members not be burdened with joint and several liability for a very substantial costs order at the end of the hearing against the risk of injustice to a defendant who has no chance of recovering very substantial costs from the plaintiff if it is successful in defending the proceedings, concluding at [142] that:

Much would depend upon the number of group members involved, their financial circumstances and in particular whether an order for security for costs might stifle the proceedings. …

166. In De Jong, Beech-Jones J at [27] considered that the decision in Madgwick also stood for the proposition that solicitors conducting proceedings on the basis that they would only be paid in the event of a successful judgment or settlement were not to be equated with litigation funders; i.e. they were not to be treated as a person standing behind the plaintiff or as a person on whose behalf the proceedings were brought.

167. In Eades v Endeavour Energy [2018] NSWSC 801, Garling J at [54]–[59] considered the applicable legal principles in the context of determining whether to order security for costs in representative proceedings, quoting the summary of the principles set out in De Jong by Beech-Jones J at [6] and then saying as follows:

[57]   The particular factors mentioned in De Jong are not the only potentially relevant ones.

[58]   As Madgwick notes, factors which may be potentially relevant include not just whether a plaintiff is impecunious, but whether that impecuniosity was caused by conduct which is the foundation for the action; the promptness of the application, including the stage of the proceedings at which the application was made; whether the plaintiff had been deliberately selected as a “man of straw” so as to preclude the defendants recovering costs if ultimately successful; the characteristics of the group members, including whether security would have been ordered if the action was a separate stand-alone proceeding; and the strength of the plaintiff’s case.

[59]   The matters to which I have earlier referred are not mandatory considerations in each case, nor are they the only considerations which it is open to the Court to take into account. The Court is obliged to take all relevant factors into account. …

168. The principles set out in De Jong at [26] were expressly approved in Abbott v Zoetis Australia Pty Ltd (No 2) [2019] FCA 462; (2019) 369 ALR 512 by Lee J at [14], who also said at [15]:

Critically, however, context is everything, and nothing in Bray or Madgwick should be seen as delimiting or attenuating the broad discretion the Court has to order, or decline to order, security. It is a discretion to be exercised judicially, having regard to a consideration of the particular facts of the case: Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Ltd (1998) 193 CLR 502; 155 ALR 1; 28 ACSR 103; [1998] HCA 41. If they are relevant, the factors that may be taken into account are unrestricted, and the weight to be given to them depends upon the fact’s own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: see Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114; Morris v Hanley [2000] NSWSC 957 at [11]–[21]; Acohs Pty Ltd v Ucorp Pty Ltd (2006) 155 FCR 181; 236 ALR 143; 59 ACSR 225; [2006] FCA 1279 at [12].

169. The position of an individual lead plaintiff who is a member of a class on whose behalf representative proceedings have been brought was the subject of particular consideration in Its Eco Pty Ltd v BPS Financial Ltd [2022] FCA 842, Derrington J saying at [3]:

As a preliminary issue it is appropriate to note that Ms McManus is an individual and, so it might be assumed, will be many of the members of the class on whose behalf the action is being conducted. As a general rule orders for security for costs have not been made against individuals in “bilateral litigation”: Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523: and there are good reasons of principle as to why that is so. However, those principles are inapt in the context of the modern phenomena of class actions. In particular, class actions are pursued on behalf of the group members who stand to gain from the litigation but who, by reason of s 43(1A) of the Federal Court Act, are immune from an order for costs if it is unsuccessful. Although the policy decision in s 43(1A) is to be respected it is, nevertheless, a significant factor in the Court’s exercise of discretion on the question of whether security for costs ought to be ordered. It necessarily creates asymmetrical opportunities for the recovery of costs in class actions. On one side of the record the applicants usually have recourse against the respondents or their insurers to substantial recovery in respect of their own claims and the claims of others as well as indemnity, either partial or whole, in respect of their costs. Those costs are usually massively increased because the litigation is being carried on for the benefit of a large number of class members or, perhaps more accurately, that is the proffered reason for the increase. In particular, a regular feature of class actions is the inordinate amount claimed for undertaking disclosure the cost of which, so it is said, is increased due to the large number of class members. On the other side of the litigation, the respondents are limited to recovering costs from the lead applicants to the extent to which their assets permit. This is an important contextual issue in which the discretion to order security for costs in class actions is to be exercised and it is more than sufficient to displace the Court’s natural reluctance to decline to order security for costs against individual litigants. Indeed, the fact that an impecunious individual brings a representative proceedings on behalf of a number of represented persons may well be a significant factor in favour of making an order for the provision of security: Abbott v Zoetis Australia Pty Ltd (No 2) (2019) 369 ALR 512 , 517 [14] (Abbott v Zoetis (No 2) ) per Lee J approving Beech‐Jones J in De Jong v Carnival PLC [2016] NSWSC 347 [26].

170. These considerations were expanded upon in greater detail later in Its Eco, Derrington J stating at [38]–[39]:

[38]   Although it is not necessary to decide, there are strong policy reasons for Courts adopting a predisposition in favour of making an order for security for costs in class actions where the lead applicants are impecunious in the sense that they are not in a position to meet an adverse order for the costs of the application. Not only do the lead applicants seek to recover an amount which is, in terms of quantum, usually more for the benefit of others than themselves, they incur costs vastly in excess of the amount which is usually incurred in bilateral litigation. This latter point is significant. In the course of class action litigation, the costs incurred by the lead applicants include the costs claimed by their solicitors in dealing with the members of the class, including advertising the class action, contacting the potential class members, obtaining information from them, and providing them with details about the litigation. The size of discovery and the cost involved in it are greatly increased by reason of the existence of the class members. Experience reveals that the fees generated by the applicants’ solicitors are greater by orders of magnitude than those which might be incurred in the course of ordinary litigation and the costs of dealing with the class members is provided as the justification for it. It follows that, although the lead applicants are the only persons against whom a costs order might be made, the litigation is carried on for the benefit of others in respect of whom substantial costs are incurred, and which costs may be recovered from the respondents. Although it is said that there is a relative passivity to the role of the class members, that does not alter the fact that the costs of the proceedings are greatly increased by reason of their presence.

[39]   Necessarily, such circumstances strengthen the justification for making an order for security for costs as, not only is the action carried on for the class members who might recover judgment, additional costs are incurred for their benefit, yet they remain immune from an adverse costs order. As this particular point was not raised in the course of the hearing, it is not one which is taken into account in the exercise of the discretion.

171. Where there is an impecunious corporate plaintiff, in the exercise of the discretion attention turns to those who stand behind the corporation and stand to benefit from the outcome of the litigation. In Pioneer Park Pty Ltd (in liquidation) v Australia and New Zealand Banking Group Ltd (2007) 65 ACSR 383; [2007] NSWCA 344, Basten JA at [52] said that:

… a reason for not ordering security, may arise where all those who seek to benefit from the litigation are willing to step out from behind the corporate shield and offer undertakings in relation to an adverse costs order in the event of failure. …

172. If those standing behind an impecunious corporate plaintiff offer personal undertakings to pay the costs of the defendant if the proceedings are unsuccessful, then their respective financial positions are not relevant: Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276; [2007] NSWCA 291, Basten JA at [32].

173. The absence of evidence of the financial position of a person standing behind an impecunious corporation who offers no personal undertaking to pay the costs of the defendant is a fundamental matter, which weighs heavily in favour of making an order for security: Jazabas, McClellan CJ at CL (with whom Mason P and Basten JA agreed) at [91].

174. An impecunious plaintiff who opposes security being ordered on the basis that the conduct of the defendant applying for security caused the impecuniosity must substantiate that claim. In Broadway Plaza Investments v Broadway Plaza Pty Ltd; In the matter of Combined Projects(Arncliffe) Pty Ltd [2019] NSWSC 1082, Ward CJ in Eq (as the President then was) at [196] said:

A plaintiff who opposes the provision of security for costs on the basis that there is a causal connection between the plaintiff’s impecuniosity and a defendant’s conduct must substantiate that claim by appropriate evidentiary material; mere assertion or submission being insufficient (see Ninan v St George Bank Ltd [2012] FCA 905; (2012) 294 ALR 190 at [37]). This requires proof of “a real causal connection between the conduct and the impecuniosity which, in the exercise of the Court’s discretion, would make it unjust to require security” (see Dalma Formwork Pty Ltd (Administrator Appointed) v Concrete Constructions Group Ltd [1998] NSWSC 472 (Rolfe J)). It must be shown that the defendant’s conduct is the material contributor to or cause of the plaintiff’s impecuniosity (see The Owners – Strata Plan 87265 v Saaib [2019] NSWSC 289 (Saaib)). Stevenson J noted in Saaib (at [45]) that this factor usually requires “consideration of whether the matters complained of in the proceedings caused the plaintiff to be, when the proceedings were commenced, without the means to meet a costs order”. Without evidence of the financial position of the plaintiff prior to the alleged wrongdoing by the defendants, in the Ingot litigation the Court was unable to satisfy itself of that causal connection (see Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2002] NSWSC 609 at [96]).

175. In essence, an impecunious plaintiff has the onus of proving its financial position before their dealings with the alleged wrongdoers and that the alleged wrongdoers’ actions have caused or at least materially contributed to the plaintiffs’ inability to meet an order for security for costs: Jazabas, McClellan CJ in Eq at [94]–[95].

176. Among the foregoing principles, the issue of stultification looms large. It is an issue which frequently arises in non-representative proceedings.

177. Stultification is one of several factors to which a court exercising the discretion whether to order security for costs under r 42.21 of the UCPR may have regard, although it is a powerful factor: Live Board Holdings v Cody Live Pty Ltd [2017] NSWCA 302, Bathurst CJ, Leeming JA and Barrett AJA at [92]. It is expressly referred to in r 42.21(1A)(f) of the UCPR.

178. In Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11, Hodgson JA considered the relevant approach where a corporate plaintiff contends that an order for security will stultify the proceedings at [23]–[27] as follows:

[23]   On the question of the approach to be taken to contentions that the requirement of security will stultify proceedings where the litigant is a company, it was stated by the full Federal Court in Bell Wholesale Co Limited v Gates Export Corporation [1984] FCA 34; [1984] 2 FCR 1 at 4 as follows:

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 the 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 security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts.

192. Secondly, there are multiple glaring omissions about the financial position of Mr Hana, which appears to be intricately tied to the financial positions of House of Finance Aus and House of Finance Group and the numerous SPVs which have been established to enable him to make property investments. On these applications, the full financial position of Mr Hana is opaque and incomplete. The hearsay assertions which are made about his financial position are not matched with documents which would enable a full objective analysis of it to be undertaken. In particular, there are no financial statements of House of Finance Group or House of Finance Aus in evidence to establish their financial positions, there is no expert evidence which would enable a valuation of Mr Hana’s interests in House of Finance Group or House of Finance Aus to be made, there are no statements of any bank accounts held by Mr Hana in evidence, there are no income tax assessment documents either side of the 2023 financial year in evidence, and the returns which have been made by Mr Hana from the property investments of the SPVs are not in evidence. The fact that Mr Hana was not completely candid in detailing his financial position and it was left to the defendants to discover various properties which he had bought and sold but had not disclosed in evidence on these applications is not to his advantage. In applications such as these where stultification is central to the basis on which the lead plaintiffs resist an order for security, there is no place for the vague and convoluted evidence on the topic of Mr Hana’s financial position which was presented.

193. Thirdly, as I have indicated above, I attach very little weight to the unsatisfactory evidence given about the financial positions of each of the Group Members, particularly in light of the fact that they are a closed class of 48 (16 of which are corporations, being the Franchisee Group Members) across 17 franchises, can all be readily identified and are not so numerous as to make the task of marshalling evidence about the financial position of each of them an onerous undertaking. There is no transparency in the questions that they were asked that gave rise to the hearsay assertions in evidence. There is no documentary evidence to support any of the hearsay assertions given on behalf of those Group Members for whom financial details were given. There are only financial details given for 25 of the 48 Group Members, with nothing provided in relation to the balance.

194. When a case for stultification of the lead plaintiffs’ claims is submitted, I cannot be put in a position of being left to guess whether the identified people who will benefit from the litigation are of financial means or not. Yet the lead plaintiffs have done precisely that by their failure to provide the evidence required to make out a case for stultification. The lead plaintiffs have failed to meet their onus. On the evidence that the lead plaintiffs have chosen to present, I am not satisfied that the lead plaintiffs have proved that their claims are likely to be stultified.

195. I note that none of Mr Hana, Mr Youssef or any of the Group Members has given a personal undertaking to pay the costs of the defendants in the event that an adverse costs order is made against the lead plaintiffs. Applying the principle in Jazabas at [32] and [91], this failure is a further factor which tends in favour of ordering security for the defendants’ costs.

196. In relation to the issue of the ATE insurance, as I have found above, I am satisfied that the lead plaintiffs have demonstrated that the prospects of them obtaining ATE insurance in these proceedings is remote. I do not consider the failure to obtain ATE insurance to be a basis on which the lead plaintiffs could be criticised or a factor weighing in the discretion against them.

197. Much was made by the defendants of the likelihood that the lead plaintiffs’ claims will be stultified in any event because the evidence does not reveal that Levitt Robinson and the lead plaintiffs have agreed that Levitt Robinson will charge the lead plaintiffs on a speculative basis and, even if the terms of the Conditional Costs Agreement are assumed to be agreed and Levitt Robinson will charge on a speculative basis, the lead plaintiffs are required to fund at least $300,000 for disbursements. The evidence put forward by the lead plaintiffs about the basis on which they will be charged fees and disbursements by Levitt Robinson is exceptionally unsatisfactory because the Conditional Costs Agreement has not been signed by the lead plaintiffs, as it must be in accordance with s 181(3)(a) of the LPUL, and the lead plaintiffs have not proved the basis on which they have been charging fees and disbursements to the plaintiffs before the termination of the Funding Agreement. In any event, even if Levitt Robinson are charging on a speculative basis, in accordance with the principle in De Jong at [27], they will not be considered as persons standing behind the lead plaintiffs who will benefit if the proceedings are successful. I am simply not able to reach a conclusion about whether the lead plaintiffs will be able to fund their own legal costs in the proceedings.

198. Submissions were also directed to the suggestion that there is evidence that Galactic will seek commission if there is a successful outcome of the proceedings for the plaintiffs and therefore Galactic is also a party which stands to benefit if that eventuates. I am not satisfied that Galactic is entitled to such commission but even if I were so satisfied I do not know what I would make of this factor in relation to the discretion for ordering security.

199. In circumstances where the lead plaintiffs accept that they are unable to meet an adverse costs order, they are suing for the benefit of others and I am unable to make a finding of the inability, rather than the unwillingness, of Mr Hana, Mr Youssef and the Group Members to contribute towards an order for security, I consider that the risk of injustice to the defendants in incurring substantial costs without having appropriate security for those costs outweighs all other considerations relevant to the exercise of my discretion.

ISSUE 2: QUANTUM OF SECURITY FOR COSTS

213. I consider that it is not appropriate to refer the determination of quantum of the security for costs I propose to order to a referee as this will contribute to greater delay and costs in determining this issue.

214. I am of the view that it is appropriate to determine the quantum of the security on each of the defendants’ applications in turn, noting that the parties do not contest the legal principles I am to apply to that task.

215. I have endeavoured to deal with the quantum of the security to be ordered in each application by recognising that there will be distinct phases of the proceedings in which the defendants will incur categories of costs for which the security should be provided in advance. This approach reflects the balancing of justice to the lead plaintiffs by them not having to pay security for the totality of the proceedings well in advance of them concluding, while also ensuring that the recovery of the defendants’ costs is protected before they commence to incur them on each phase.

Legal principles

216. In Louise Haselhurst v Toyota Motor Corporation Australia Ltdt/as Toyota Australia [2020] NSWSC 1607, Sackar J at [12]–[19] helpfully summarised the relevant principles to be applied in determining the quantum of security for costs, stating as follows:

[12]   In determining the quantum of an order for security the Court does not set out to give a complete and certain indemnity to a defendant and there is no principle that entitles a defendant to be given security for the whole of its recoverable costs (CBX2 Pty Ltd v National Australia Bank (No 2) [2015] NSWSC 1969 at [54] and [55]).

[13]    Rather the Court embarks on a process of estimation which embodies to a considerable extent, necessary reliance on the "feel" of the case after considering relevant factors (see, e.g., Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 515 (French J)).

[14]   Whilst the Court requires some evidentiary basis for the estimate of costs, a precise estimate is not required. The Court is not fixing a gross sum amount, and should not decline to act on the evidence before it because the evidence was not the “best evidence” available to support the application (Pathway Investments Pty Ltd & Anor v National Australia Bank Limited [2012] VSC 97 at [35]-[38]; DIF III Global CoInvestment Fund LP v BBLP LLC [2015] VSC 484). Although a discount for exigencies may be required (see, e.g., Pathway Investments Pty Ltd & Anor v National Australia Bank Limited [2012] VSC 97 at [55]).

[15]   Further the Court is to stand back from the amounts claimed and the precise assessment of costs to consider the case on its particular facts and will make an order that is just and reasonable in the circumstances (Wollongong City Council v FPM Constructions Pty Ltd [2004] NSWSC 523 at [50]).

[16]   In embarking on such a process the Court is not required to attempt its own detailed costs assessment but can take a “broad brush” approach having regard to the information before it, seeking to prevent (on the one hand) prejudice to the party paying costs by overestimating the costs and (on the other hand) injustice to the party recovering costs by adopting an arbitrary “fail safe” discount across the board on the costs claimed (see, e.g., Allstate Life Insurance Co v ANZ Banking Group Ltd (1995) 134 ALR 187 at 199–201; Ashington Capital Pty Ltd v Parissen Capital (Project X) Pty Ltd [2012] NSWSC 410 at [17]–[18]; Pathway Investments Pty Ltd & Anor v National Australia Bank Limited [2012] VSC 97 at [25]).

[17]   An important factor informing the exercise of the Court’s power to order security for costs where a person such as a litigation funder stands behind the plaintiff is that those who seek to benefit from litigation should bear the risks and burdens that the process entails (see, e.g., Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at 584 [83] (Austin J)).

[18]   However in Allen Dodd as Trustee for the Dodd Superannuation Fund v Shine Corporate [2018] QSC 40 Martin J noted that the involvement of a funder may loosen slightly the stringency which normally attaches to the calculation of the appropriate security amount.

[19]   It has also been accepted that where multiple defendants have a common interest but are separately represented the Court has a discretion to make an order having the effect that the unsuccessful plaintiff does not pay full costs in respect of all defendants. That may be achieved by disallowing the costs of the additional defendants or reducing the costs payable by the plaintiff in respect of each defendant (ACN 115 918 959 Pty Ltd v Hoeys Lawyers Pty Ltd & Ors (Costs Ruling) [2018] VSC 508 at [39]; see also Local Democracy Matters Inc v Infrastructure NSW (No 2) [2019] NSWCA 118 at [21]-[23]; Andrianakis v Uber Technologies (Ruling No 1) [2019] VSC 850).

Quantum of security for costs of Fogo Brazilia and Mr Dresner

217. The lead plaintiffs, Fogo Brazilia and Mr Dresner agreed on the amount of $110,000 to be paid as security for costs up to the close of pleadings, which was paid into court by the lead plaintiffs on 23 March 2022.

218. At the hearing of this application, the lead plaintiffs have agreed with the quantum sought by Fogo Brazilia and Mr Dresner in relation to several categories of costs and on the application of a 30% reduction to be applied on all actual costs to arrive at a party/party amount, but other categories of costs are in dispute between them. I have made my calculations based on a 30% deduction.

219. In making my calculations there appears to be discrepancies in the calculations made by Fogo Brazilia and Mr Dresner and the lead plaintiffs in arriving at their respective total costs with a 30% deduction submitted in this application. Fogo Brazilia and Mr Dresner submitted that their total costs with a 30% deduction are $1,549,993.52, but my calculation of the amounts submitted by Fogo Brazilia and Mr Dresner for their total costs with a 30% deduction is $1,581,581.02 (as set out in the table below). The lead plaintiffs submitted that Fogo Brazilia and Mr Dresner’s costs with a 30% deduction are $700,000.00, but my calculation of the amounts submitted by the lead plaintiffs for Fogo Brazilia and Mr Dresner’s total costs with a 30% deduction is $672,911.68 (as set out in the table below).

220. The respective positions of the parties on the categories of costs which are agreed and disputed using a 30% deduction and correcting the discrepancies in the calculations submitted by Fogo Brazilia and Mr Dresner and the lead plaintiffs are set out in the table below:

Category Description	Fogo Brazilia/Mr Dresner ($)	Lead plaintiffs ($)	Difference ($)
Top up of security up to the close of pleadings	39,173.93	39,173.93	0
Close of pleadings to 12 February 2024	34,023.19	30,408.70	3,614.49
Review the plaintiffs’ lay evidence	169,561.70	51,700.00	117,861.70
Respond to the plaintiffs’ lay evidence	254,590.00	22,575.00	232,015.00
Review the plaintiffs’ reply lay evidence	31,587.50	24,126.75	7,460.75
Review the third and fourth defendants’ lay evidence	56,520.50	0	56,520.50
Respond to the third and fourth defendants’ lay evidence	41,580.00	0	41,580.00
Review the plaintiffs’ expert evidence	4,492.90	0	4,492.90
Respond to the plaintiffs’ expert evidence	89,285.00	89,285.00	0
Review the third and fourth defendants’ expert evidence	8,233.80	4,116.90	4,116.90
Respond to the third and fourth defendants’ expert evidence	37,940.00	0	37,940.00
Review the plaintiffs’ reply expert evidence	1,828.80	1,828.80	0
Supplementary expert reports/joint expert reports	46,620.00	0	46,620.00
Discovery, notices to produce and subpoenas	37,030.00	32,715.00	4,315.00
Directions hearings	8,715.00	6,500.00	2,215.00
Interlocutory applications	12,635.00	6,317.50	6,317.50
Correspondence	14,000.00	14,000.00	0
Trial preparation	139,650.00	69,825.00	69,825.00
Trial on liability and quantum	493,360.00	246,680.00	246,680.00
Disbursements between now and the end of trial	29,166.20	29,166.20	0
Total costs (30% reduction)	1,581,581.02	672,911.68	908,669.34
Total costs submitted (30% reduction)	1,549,993.52	700,000.00 rounded up from $680,686.68	849,993.52
Actual costs	2,214,276.46

221. On the calculations of the amounts containing the 30% reduction put forward by Fogo Brazilia and Mr Dresner, it would appear that their total actual costs are $2,214,276.46. On the amounts using the 30% deduction, the difference between Fogo Brazilia and Mr Dresner’s total costs as submitted by them and calculated by me compared to Fogo Brazilia and Mr Dresner’s total costs as submitted by the lead plaintiffs and calculated by me is $908,669.34 (approximately $900,000.00).

222. The manner in which the parties have approached the calculation of the costs for each different stage of the proceedings is the antithesis of the approach I am required to take. I am not required to deal with granular arguments or with lengthy supporting evidence, as though I am dealing with an assessment of the estimated costs. The matters raised include such things as the number of pages of evidence served by the lead plaintiffs, the reduction of small cost items, very small differences on modest items, whether the defendants need to review the evidence served by other defendants and respond to it, who would engage the joint expert, the degree of preparation required for the trial and the likely length of the trial.

223. To the extent that there are matters on which I have made a determination, my findings are:

1. The cost estimates of Fogo Brazilia and Mr Dresner are a better guide than the cost estimates of the lead plaintiffs for doing the same work.

2. The lead plaintiffs’ lay evidence is substantial and requires a thorough review of all of it to prepare a response to it, which has been largely underestimated by the lead plaintiffs in their calculations.

3. The lay evidence of Fogo Brazilia and Mr Dresner is likely to be substantial.

4. It is likely to be necessary for Fogo Brazilia and Mr Dresner to review and respond to the lay and expert evidence of the other defendants, although in my view the costs estimated by Fogo Brazilia and Mr Dresner for doing so are overstated.

5. Discovery is likely to be substantial.

6. The likely length of the trial involving liability and quantum issues will be in the order of 4–5 weeks and therefore the costs estimated by Fogo Brazilia and Mr Dresner for the trial are overstated and the costs estimated by the lead plaintiffs are understated.

224. On my broad brush assessment of the points raised by the lead plaintiffs and the feel of the relevant circumstances of the case, most of them cannot be sustained. Based on those points made by the lead plaintiffs which I favour, I consider that the costs of Fogo Brazilia and Mr Dresner for which security should be ordered ought to be reduced from $1,581,581.02 to $1.3 million, a reduction of about $280,000.00, which is less than the approximately $900,000.00 reduction on the amounts contended for by the lead plaintiffs.

225. I propose to order that the amount of $1.3 million be paid in instalments in advance of major milestones to be met by the defendants to ameliorate the financial impact on the lead plaintiffs. The major milestones for the payment of these instalments would appear to be the review of all lay evidence and the responses of Fogo Brazilia and Mr Dresner to that evidence, the review and the preparation of all expert evidence and the preparation for and conduct of the trial. The amounts of each payment for those milestones based on the percentages expressed below should be:

1. Lay evidence (40%) – $520,000.00 (payable within 14 days of this judgment);

2. Expert evidence (20%) – $260,000.00 (payable 7 days prior to the date of the service of the lead plaintiffs’ first expert report); and

3. Trial (40%) – $520,000.00 (payable 28 days prior to the date of the commencement of the trial).

Quantum of security for costs of Mr Seskin

226. The lead plaintiffs and Mr Seskin agreed on the amount of $50,000 to be paid as security for costs up to the close of pleadings, which was paid into court by the lead plaintiffs on 24 June 2022.

227. At the hearing of this application, the lead plaintiffs did not agree with the quantum sought by Mr Seskin in relation to any of the categories of costs but did agree on the application of a 33% deduction to be applied on all actual costs to arrive at a party/party amount. I have made my calculations based on a 33% deduction for each category.

228. In making my calculations, I discovered discrepancies in the calculations made by Mr Seskin and the lead plaintiffs in arriving at their respective total costs with a 33% deduction submitted in this application. Mr Seskin submitted that his total costs with a 33% deduction are $956,000.00 but my calculation of the amounts put forward by Mr Seskin for his total costs with a 33% deduction is $907,118.11 (as set out in the table below). The lead plaintiffs submitted that Mr Seskin’s costs with a 33% deduction are $486,500.00 but my calculation of the amounts submitted by the lead plaintiffs for Mr Seskin’s total costs with a 33% deduction is $386,913.28 (as set out in the table below).

229. The respective positions of the parties on the categories of costs, all of which are disputed, using a 33% deduction and correcting the discrepancies in the calculations submitted by Mr Seskin and the lead plaintiffs are set out in the table below:

Category Description	Mr Seskin ($)	Lead plaintiffs ($)	Difference ($)
Top up of security up to the close of pleadings	48,958.78	0	48,958.78
Close of pleadings to 31 July 2023	56,261.66	0	56,261.66
Review the plaintiffs’ lay evidence	53,727.30	7,705.00	46,022.30
Respond to the plaintiffs’ lay evidence	119,025.50	61,774.00	57,251.50
Review the plaintiffs’ expert evidence	18,461.85	16,600.93	1,860.93
Respond to the plaintiffs’ expert evidence	111,756.00	53,600.00	58,156.00
Review the plaintiffs’ expert evidence in reply	13,671.35	5,527.50	8,143.85
Discovery	53,616.75	17,587.50	36,029.25
Subpoenas	11,128.70	0	11,128.70
Directions hearings	26,900.50	5,025.00	21,875.50
Correspondence	29,480.00	7,035.00	22,445.00
Preparation for trial and trial	390,978.50	212,058.35	178,902.15
Disbursements	22,110.00	0	22,110.00
Total costs (33% deduction)	907,118.11	386,913.28	520,204.84
Total costs submitted (33% deduction)	956,000.00	486,500.00	469,500.00
Actual costs	1,426,980.43

230. On the calculations of the amounts containing the 33% reduction put forward by Mr Seskin, it would appear that his total actual costs are $1,426,980.43. On the amounts using the 33% deduction, the difference between Mr Seskin’s total costs as submitted by him and calculated by me compared to Mr Seskin’s total costs as submitted by the lead plaintiffs and calculated by me is $520,204.84 (approximately $520,000.00).

231. As in the case of the submissions made in respect of the costs of Fogo Brazilia and Mr Dresner, the approach of the parties to the calculation of the quantum of security that should be ordered for the costs of Mr Seskin are at a level of detail which does not reflect the task I must undertake.

232. To the extent that there are matters on which I have made a determination, my findings are:

1. Mr Seskin is entitled to additional costs to the close of pleadings and from the close of pleadings until 31 July 2023.

2. The expert costs consultant evidence of Lydia Fogl supports the position that hourly rates charged for the work undertaken by APA Lawyers (the solicitors for Mr Seskin) are fair and reasonable, as are the rates of the senior and junior counsel briefed in the proceedings on behalf of Mr Seskin, and the work to be performed by APA Lawyers, senior counsel and junior counsel is necessary, fair and reasonable in light of the complexity of the matter. I agree.

3. Ms Fogl expresses the view that the overall deduction of 33% applied by Mr Seskin to his estimated fees is generous and a lower reduction would likely be made on assessment. I agree.

4. The lead plaintiffs’ lay evidence is substantial and requires a thorough review of all of it to prepare a response to it, which has been largely underestimated by the lead plaintiffs in their calculations.

5. The lay evidence of Mr Seskin is likely to be substantial.

6. Discovery is likely to be substantial.

7. The likely length of the trial involving liability and quantum issues will be in the order of 4–5 weeks, which is more than Mr Seskin and the lead plaintiffs have estimated.

8. Splitting the difference between costs estimates, as the lead plaintiffs submitted in respect of several categories, is not of itself a principled basis for arriving at an amount for an estimated costs category.

233. On my broad brush assessment of the points raised by the lead plaintiffs and the feel of the relevant circumstances of the case, none of them can be sustained. I consider that the costs of Mr Seskin for which security should be ordered ought to be reduced to $900,000, a minimal reduction of $7,118.11, which is significantly less than the approximately $520,204.84 reduction on the amounts contended for by the lead plaintiffs.

234. I will adopt the same approach to the payment of the security in advance of major milestones and the percentages that I have outlined above in respect of the security to be ordered for Fogo Brazilia and Mr Dresner. As a result, the amounts of each payment for those milestones based on the percentages expressed below should be:

1. Lay evidence (40%) – $360,000.00 (payable within 14 days of this judgment);

2. Expert evidence (20%) – $180,000.00 (payable 7 days prior to the date of the service of the lead plaintiffs’ first expert report); and

3. Trial (40%) – $360,000.00 (payable 28 days prior to the date of the commencement of the trial).

Quantum of security for costs of Lazarus Legal

235. The lead plaintiffs and Lazarus Legal agreed on the amount of $20,000 to be paid as security for costs up to the close of pleadings, which was paid into court by the lead plaintiffs in April 2022.

236. At the hearing of this application, the lead plaintiffs did not agree with the quantum sought by Lazarus Legal in relation to any of the categories of costs, but did appear to agree on the application of a 30% reduction to be applied on all actual costs to arrive at a party/party amount. I have made my calculations based on a 30% reduction.

237. In making my calculations, I discovered discrepancies in the calculations made by Lazarus Legal and the lead plaintiffs in arriving at their respective total costs with a 30% deduction submitted in this application. Lazarus Legal submitted that their total costs with a 30% deduction are $887,591.50 but my calculation of the amounts put forward by Lazarus Legal for their total costs with a 30% deduction is $719,971.70 (as set out in the table below). The lead plaintiffs submitted that Mr Lazarus Legal’s costs with a 30% deduction are $462,700 but my calculation of the amounts submitted by the lead plaintiffs for Lazarus Legal’s total costs with a 30% deduction is $335,105.40 (as set out in the table below).

238. The respective positions of the parties on the categories of costs, all of which are disputed, using a 30% deduction are set out in the table below:

Category Description	Lazarus Legal ($)	Lead plaintiffs ($)	Difference ($)
Close of pleadings to date	77,142.80	0	77,142.80
Review the plaintiffs’ lay and expert evidence	23,163.00	20,440.00	2,723.00
Respond to the plaintiffs’ lay evidence	30,265.90	5,670.00	24,595.90
Respond to the plaintiffs’ expert evidence	35,385.00	15,345.40	20,039.60
Review the plaintiffs’ expert evidence in reply	7,448.00	4,795.00	2,653.00
Discovery, subpoenas and notices to produce	92,187.90	15,995.00	76,192.90
Directions hearings and interlocutory disputes	11,543.00	4,550.00	6,993.00
Correspondence	10,959.90	5,670.00	5,289.90
Preparation for trial	194,376.00	93,240.00	101,136.00
Trial	226,065.00	169,400.00	56,665.00
Post trial	4,049.50	0	4,049.50
Lazarus Legal’s costs application	7,385.70	0	7,385.70
Total costs (30% reduction)	719,971.70	335,105.40	384,866.30
Total costs submitted (30% reduction)	887,591.50	462,700.00	424,891.50
Actual costs	1,028,531.00

239. On the calculations of the amounts without the 30% reduction put forward by Lazarus Legal, it appears their total actual costs are $1,028,531.00. On the amounts using the 30% deduction, the difference between Lazarus Legal’s total costs as submitted by them and calculated by me compared to Lazarus Legal’s total costs as submitted by the lead plaintiffs and calculated by me is $384,866.30 (approximately $385,000.00).

240. As in the case of the submissions made in respect of the costs of Fogo Brazilia, Mr Dresner and Mr Seskin, the approach of the parties to the calculation of the quantum of security that should be ordered for the costs of Lazarus Legal are at a level of detail which does not reflect the task I must undertake.

241. To the extent that there are matters on which I have made a determination, my findings are:

1. Lazarus Legal is entitled to costs from the close of pleadings to date.

2. The lead plaintiffs’ lay evidence is substantial and Lazarus Legal have only allowed for a very modest amount to conduct a review of it.

3. The lead plaintiffs’ expert evidence is likely to be substantial and will likely require considerable work to be undertaken to respond to it.

4. The lay evidence of Lazarus Legal is likely to be substantial, which has been underestimated by the lead plaintiffs in their calculations.

5. Discovery is likely to be substantial.

6. I will not allow for post-trial costs and costs of this application in the amount of the security to be ordered.

7. The likely length of the trial involving liability and quantum issues will be in the order of 4–5 weeks, which is more than Lazarus Legal and the lead plaintiffs have estimated.

242. On my broad brush assessment of the points raised by the lead plaintiffs and the feel of the relevant circumstances of the case, all of them cannot be sustained. I consider that the costs of Lazarus Legal for which security should be ordered ought to be reduced from approximately $719,971.70 to $700,000, a reduction of $19,971.70, which is less than the approximately $384,866.30 reduction contended for by the lead plaintiffs.

243. I will adopt the same approach to the payment of the security in advance of major milestones and the percentages that I have outlined above in respect of the security to be ordered for Fogo Brazilia, Mr Dresner and Mr Seskin. As a result, the amounts of each payment for those milestones based on the percentages expressed below should be:

1. Lay evidence (40%) – $280,000.00 (payable within 14 days of this judgment);

2. Expert evidence (20%) – $140,000.00 (payable 7 days prior to the date of the service of the lead plaintiffs’ first expert report); and

3. Trial (40%) – $280,000.00 (payable 28 days prior to the date of the commencement of the trial).

ORDERS

244. For the reasons set out above, I propose to make the following orders:

1. The plaintiffs are to pay into court the following amounts on the following dates as security for the costs of the first and second defendants in the proceedings:

1. $520,000.00 to be paid within 14 days of the date of these orders;

2. $260,000.00 to be paid 7 days prior to the date of the service of the first expert report proposed to be relied upon by the plaintiffs; and

3. $520,000.00 to be paid 28 days prior to the date fixed for the commencement of the trial of the proceedings.

2. If the plaintiffs fail to pay any of the amounts by any of the dates stated in order (1) above, the proceedings are stayed as against the first and second defendants until such time as the payment is made.

3. The plaintiffs are to pay into court the following amounts on the following dates as security for the costs of the third defendant in the proceedings:

1. $360,000.00 to be paid within 14 days of the date of these orders;

2. $180,000.00 to be paid 7 days prior to the date of the service of the first expert report proposed to be relied upon by the plaintiffs; and

3. $360,000.00 to be paid 28 days prior to the date fixed for the commencement of the trial of the proceedings.

4. If the plaintiffs fail to pay any of the amounts by any of the dates stated in order (3) above, the proceedings are stayed as against the third defendant until such time as the payment is made.

5. The plaintiffs are to pay into court the following amounts on the following dates as security for the costs of the fourth defendant in the proceedings:

1. $280,000.00 to be paid within 14 days of the date of these orders;

2. $140,000.00 to be paid 7 days prior to date of the service of the first expert report proposed to be relied upon by the plaintiffs; and

3. $280,000.00 to be paid 28 days prior to the date fixed for the commencement of the trial of the proceedings.

6. If the plaintiffs fail to pay any of the amounts by any of the dates stated in order (5) above, the proceedings are stayed as against the fourth defendant until such time as the payment is made.

7. The plaintiffs are to pay the costs of the first and second defendants in relation to their notice of motion filed 12 February 2024.

8. The plaintiffs are to pay the costs of the third defendant in relation to his notice of motion filed 12 February 2024.

9. The plaintiffs are to pay the costs of the fourth defendant in relation to its amended notice of motion filed 19 April 2024.

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Decision last updated: 28 November 2024