Momentum Mortgages Ltd & Equity Trustees v Elmowy & Meehan - [2010] NSWSC 950

NEW SOUTH WALES SUPREME COURT

CITATION:
Momentum Mortgages Ltd & Equity Trustees v Elmowy & Meehan [2010] NSWSC 950

JURISDICTION:

FILE NUMBER(S):
2009/294349

HEARING DATE(S):
23 August 2010

JUDGMENT DATE:
1 September 2010

PARTIES:
P1/R1 - Momentum Mortgages Ltd (Receivers and Managers Appointed) (Subject to Deed of Company Arrangement)
P2/R2 - Equity Trustees Limited A.T.F. Bookmakers Superannuation Fund
R3 - Ezcape St Projects Pty Limited ACN 106 890 653
R4 - Brett John Gilbert
D1/XC1/Applicant - Mark Anthony Elmowy
D2/XC2/Applicant - Christopher Scott Meehan

JUDGMENT OF:
Studdert AJ

LOWER COURT JURISDICTION:
Not Applicable

LOWER COURT FILE NUMBER(S):
Not Applicable

LOWER COURT JUDICIAL OFFICER:
Not Applicable

COUNSEL:
P1/R1 - Mr DR Pritchard
P2/R2 - Mr M Condon with Ms M Prangle (reader)
D1/XC1/Applicant - Mr CG Carroll
D2/XC2/Applicant - Mr CG Carroll

SOLICITORS:
P1/R1 - Garland Hawthorne Brahe Solicitors
P2/R2 - Holman Webb Lawyers
D1/XC1/Applicant - Levitt Robinson Solicitors
D2/XC2/Applicant - Levitt Robinson Solicitors

CATCHWORDS:
Practice and Procedure – Security for costs – Company – Impecuniosity – Whether “reason to believe” inability to pay – Co-plaintiffs – Whether identity of issues on their claims – Cross claim against plaintiffs – Exercise of Court’s discretion

LEGISLATION CITED:
Corporations Act 2001 (Cth), s 1335
Trade Practices Act 1974 (Cth), ss 51A, 52
Uniform Civil Procedure Rules 2005 (NSW), r 42.1

CATEGORY:
Separate question

CASES CITED:
Ardern v Bank of New South Wales [1956] VLR 569
Beach Petroleum NL v Johnson (1992) 7 ACSR 203
Brewer v Westminster Bank Ltd [1952] 2 All ER 650
Catlin v Cyprus Finance Corporation (London) Ltd [1983] QB 759
Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd [1998] NSWSC 472; and [1999] NSWCA 16
Dalma Formwork Pty Limited v Concrete Constructions Group Limited [1998] NSWSC 472
FFE Minerals Australia Pty Limited v Mining Australia Pty Limited (2000) 156 FLR 116
Financial Industry Complaints Service Limited v Deakin Financial Services Pty Limited (2006) FCA 1805
Harpur v Ariadne Australia Limited (1984) 8 ACLR 835
Hurworth Nominees Pty Ltd v ANZ Banking Group Ltd [2005] NSWSC 1360
Ingot Capital Investments Pty Ltd & Ors v Macquarie Equity Capital Markets Ltd & Ors [2002] NSWSC 609
John Bishop (Caterers) Ltd v National Union Bank Limited (1973) 1 All ER 707
KDL Building Pty Ltd v Mount [2006] NSWSC
Krambousanos v Jedda Investments Pty Ltd (1996) 64 FCR 348
Livingspring Pty Limited v Kliger Partners (2008) 66 ACSR 455
Maples v Hughes [2002] NSWSC 617.
Pacific Acceptance Corp Ltd v Forsyth (No 2) [1967] 2 NSWR 402
Street v Luna Park Sydney Pty Limited [2006] NSWSC 1317
Sydmar Pty Limited v Statewide Developments Pty Limited (1987) 11 ACLR 616

TEXTS CITED:

DECISION:

By consent leave granted to the defendants and Ezcape St Projects Pty Ltd to file a cross claim in these proceedings.
The cross claim is to be filed and served within 21 days from today.
Order that the first plaintiff provide security for the first and second defendants’ costs of and incidental to defending the proceedings, in a form acceptable to the registrar as follows:
(a) Within 28 days in the sum of $14,000.
(b) Not less than 42 days prior to the hearing date appointed, in the further sum of $70,000.
Costs of the application are to be costs in the cause.

JUDGMENT:

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION
CIVIL LIST
STUDDERT AJ
WEDNESDAY 1 SEPTEMBER 2010
2009/294349 Momentum Mortgages Ltd (Receivers and Managers appointed) (Subject to Deed of Company Arrangement), and Equity Trustees Limited A.T.F. Bookmakers Superannuation Fund v Mark Anthony Elmowy & Christopher Scott Meehan

JUDGMENT

HIS HONOUR: By amended notice of motion filed 12 October 2009 the defendants Mark Anthony Elmowy and Christopher Scott Meehan made application for an order for security for costs as against the first plaintiff. The defendants also seek leave to file a cross claim but that application is consented to and the leave will be granted to file the proposed cross claim.

The application for security for costs is opposed by the first plaintiff to which I shall refer shortly as “Momentum”. No similar application was made against the second plaintiff to which I shall refer shortly as “Equity Trustees”. Equity Trustees was nevertheless represented on the application.

Claim brought by Momentum and Equity Trustees

By their statement of claim, Momentum and Equity Trustees seek to recover a judgment against both defendants for $13,791,478.70. Briefly stated, the plaintiffs’ case is that they advanced the sum stated to Ezcape Street Projects Pty Limited, the advance being secured by a mortgage over property. The defendants are alleged to have guaranteed the payment of the loan by way of a deed of guarantee and indemnity (DGI). The mortgage and the DGI were entered into in June 2007.
The relevant mortgage and the relevant DGI form annexures to an affidavit of Chrystalla Georgiou sworn on 3 May 2010. The execution of the mortgage is admitted by the defendants but default by the mortgagor is denied. The execution of the DGI is not admitted. The defendants deny that the DGI is enforceable against them on grounds pleaded in the defence. Defences are raised to which I will make reference later.

The threshold issue

In seeking security for their costs as against Momentum the defendants rely upon s 1335 of the Corporations Act 2001 (Cth). Section 1335(1) of the Corporations Act provides so far as is relevant:
“(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.”
There has been no dispute in this matter as to the principles which govern an application such as the one presently under consideration. It is for the defendants who make this application to prove that an order for security for costs should be made. The statutory test is clear, namely whether “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 the defendant succeeds in the defence of the claim brought by the plaintiff. See Livingspring Pty Limited v Kliger Partners (2008) 66 ACSR 455. It is for the defendants here to establish by credible testimony the reason to believe that the corporation will be unable to pay the defendants’ costs. The statutory requirement does not call for credible testimony that the corporation would not be able to meet any costs order made against it, but rather that the applicant is required to establish no more than that there is “reason to believe that the respondent would be unable”. See FFE Minerals Australia Pty Limited v Mining Australia Pty Limited (2000) 156 FLR 116 and in particular the judgment of Pidgeon and Owen JJ at p122 [22].
The test set by the legislature for the defendants is not a demanding one. In Street v Luna Park Sydney Pty Limited [2006] NSWSC 1317 Brereton J cited the dicta of Von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203. I refer to what Brereton J said in Street at paragraphs [6]-[7]:
“6 I turn then to consider whether the ground which I have described as corporate impecuniosity, has been established. In Beach Petroleum NL v Johnson (1992) 7 ACSR 203, Von Doussa J said at [205]:
In my opinion the power of the court under s 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security.
7 This test has been applied in this Court [Hurworth Nominees Pty Ltd v ANZ Banking Group Ltd [2005] NSWSC 1360, [25] (White J); see KDL Building Pty Ltd v Mount [2006] NSWSC 474, [5]]. In Hurworth Nominees, White J - correctly, in my respectful opinion - described it (at [41]) as an undemanding test.”
Accepting as I do the approach adopted in the cases cited above and that the test which the defendants must here satisfy to cross the threshold is not a demanding one, it is necessary to consider the relevant evidence in this case.

The evidence as to the first plaintiff’s financial position

The evidence introduced on this application included a report from a chartered accountant Peter Blythe bearing date 1 October 2008. Mr Blythe noted [at para 81 of his report] that the balance sheet summary for Momentum showed
“current liabilities exceeding current assets at 30 June 2006 by $5,622,358. This prima facie indicates there was a serious deficiency of working capital on or about that date, mainly due to the mismatching of the maturity of Momentum’s loans and debentures.”
Mr Blythe’s opinion as expressed in his report was as follows:
“106. In my opinion, based on the financial position disclosed in the financial statements of Momentum, including the significance to the company of loan defaults and the loan and debenture maturity positions, the company was insolvent on or about 30 June 2008.”
Receivers were appointed for Momentum on 13 October 2008. Momentum entered into a Deed of Company Arrangement in February 2009 (the DOCA). At a meeting of debenture holders on 12 November 2009 it was resolved that the Trustee execute a variation to the DOCA to retire the receivers and to return the control of the company to the directors (see paragraph 24 of the affidavit of Chrystalla Georgiou sworn 25 November 2009 and the exhibited letter referred to in that paragraph).
As the deed administrator, Mr Leigh presented to the Court in response to a subpoena documents tendered by Mr Carroll and admitted into evidence as exhibit A. These documents include monthly reports from the directors of Momentum to Mr Leigh. In the course of 2010 these reports show that for February 2010 the bank balance for Momentum was $74,999.10; for March 2010 the balance was $34,304.14; for April 2010 the balance was $55,350.09; as at 17 May 2010 the reconciled cash balance was $18,348.64, falling to $1,336.36 by 28 May 2010; for June 2010 the balance was even lower, $550.53.

The affidavit of Stewart Levitt sworn in 7 September 2009 indicates that search discloses no record of any real property held by the first plaintiff in this State.

A presentation of accounts and statement form was lodged by Mr Leigh with the Australian Securities and Investments Commission (ASIC) on 12 March 2010 and this forms annexure E to the affidavit of Chrystalla Georgiou sworn 3 May 2010. This document on the face of it was lodged by Mr Leigh as the deed administrator. In the section of the document headed “secured lenders” the estimated value of property subject to the deed was stated to be $37,680,257. The amount owing under this same heading was stated to be $37,295,650.40. While this leaves a surplus of $384,506.60, the same document shows a category of unsecured creditors whose interests total $1,002,981. Mr Carroll submitted that the content of this document lodged in March of this year gives reason to believe the first plaintiff would be unable to pay the costs of the defendants if they succeed in their defence in the subject claim.

Moreover, Mr Carroll drew attention to the absence of any evidence introduced by the first plaintiff to indicate that the first plaintiff’s financial position was healthier than the statement just considered suggests. Mr Carroll submitted that the defendants were entitled to rely on the failure of the first plaintiff to introduce evidence as to its means to pay costs if ordered, citing Pacific Acceptance Corp Ltd v Forsyth (No 2) [1967] 2 NSWR 402 and the judgment of Moffitt J as he then was at 404. See also FFE Minerals Australia Pty Limited v Mining Australia Pty Limited (supra). Of course, in determining what weight I should give to this submission, I bear in mind what Mr Miller wrote on 19 April 2010 (see Annexure D to the affidavit of Chrystalla Georgiou 3 may 2010). As at the date of Mr Miller’s letter, his instructions were that the Receivers did not take steps to prepare financial statements for the year ended 30 June 2009 and the first plaintiff was under their control until 22 December 2009. As at 19 April 2010 there are no financial statements to produce. What has happened since then has not been the subject of evidence.

Mr Pritchard SC submitted that analysis of the ASIC documents filed 12 March 2010 warranted a different conclusion from that which Mr Carroll invites. The value of the property in respect of which there were secured lenders exceeded the amount owing to those lenders by the figure calculated by Mr Carroll but the document lodged also indicated under the heading “Account of receipts and payment” that “money held” amounted to $508,591.91. Hence what the document shows overall is cash and equity to a value of $893,098.51. On this analysis there remains of course a shortfall because of the unsecured creditors owed as indicated by the document, just over $1,000,000.

Mr Carroll submitted that an order for costs if made against the first plaintiff would invite a payment governed by clause 5.3 of the DOCA which addresses distributions from the fund available to pay claims. Mr Carroll submitted that clause 5.3(i) would apply and this would place the defendants seeking to recover costs in the ninth category of those seeking distribution from the fund. What clause 5.3(i) provides is as follows:
“(i) Ninth, in payment of Admitted Claims of Unsecured Creditors (to the extent not already paid) up to an amount equal to 10 cents in each dollar owed and $50,000 in aggregate.”
Mr Pritchard submitted this interpretation of the DOCA was not correct and that the defendants with an order for costs in their favour would not be unsecured creditors in category nine. Mr Pritchard submitted that the defendants seeking to recover costs would be in a more favourable category, namely that under clause 5.3(b). He submitted there was no evidence that any payments would be called for under clause 5.3(a) (“in payment of Admitted Claims of Employees”), and that the claims of the defendants would rank at the second level “in payment of the DOCA liabilities”, as defined in the interpretation clause of the DOCA.

I prefer Mr Pritchard’s submissions as to the order of priority that a costs order against the first plaintiff would attract under the DOCA, but I nevertheless find that the defendants have crossed the threshold on this application. The evidence relied upon by the defendants suffices to establish that there is reason to believe that the first plaintiff will be unable to pay the reasonable costs of the defendants should they succeed in their defence to the claim brought against them. Having determined this threshold issue in favour of the defendants I turn to consider discretionary matters.
It has been agreed for the purposes of this application that the defendants’ costs of defending these proceedings will amount to $140,000. Mr Pritchard makes a submission to the effect that a lesser sum would be an appropriate figure if I am persuaded to order security, but I shall turn to that presently.

The nature of the discretion to be exercised

It is common ground that the nature of the discretion as to the making of an order of the type here sought is a broad one. In Sydmar Pty Limited v Statewide Developments Pty Limited (1987) 11 ACLR 616 Smart J at pp626-627 identified factors relevant to the exercise of the discretion to order security. Rolfe J noted those same factors as relevant in Dalma Formwork Pty Limited v Concrete Constructions Group Limited [1998] NSWSC 472. See also the judgment of Brereton J in Street v Luna Park (supra).

In the present case as Mr Pritchard made plain in his submissions the focus was on two matters:

1. The presence in the proceedings of the co-plaintiff;
2. Pursuit by the defendants of a cross claim.

No application for security for costs is being pursued against the second plaintiff, for very good reason. Evidence introduced by Mr Pritchard establishes that the second plaintiff is in a very strong position financially. The consolidated financial report for the second plaintiff for the six months ended 31 December 2009 reveals total equity of more than $53,000,000 and profit for the same six monthly period in excess of $3,000,000 (see exhibit 1). Mr Pritchard submitted that security for costs should not be ordered against the first plaintiff when the defendants if they succeed can look to the second plaintiff to satisfy any costs order in their favour.

I treat it as settled that where there is a complete identity of issues in the cases that are brought by co-plaintiffs and the plaintiff who is not impecunious will be subjected to a costs order if unsuccessful such as would make it liable for the same costs as are ordered against the impecunious plaintiff, then security for costs should not be ordered against the impecunious party. See John Bishop (Caterers) Ltd v National Union Bank Limited (1973) 1 All ER 707, and the judgment of Plowman J at 710-711; Harpur v Ariadne Australia Limited (1984) 8 ACLR 835 and in particular the judgment of Connolly J at 841; Ingot Capital Investments Pty Ltd & Ors v Macquarie Equity Capital Markets Ltd & Ors [2002] NSWSC 609 and Maples v Hughes [2002] NSWSC 617.

Is there a complete identity of issues here, arising on the claims brought by the co-plaintiffs? Mr Pritchard submits that there is but Mr Carroll contends otherwise.

It is necessary to have regard to the pleadings. The statement of claim pleads the following:
(a)The agreement of the plaintiffs to advance funds pursuant to a Loan Facility.
(b)The advance of funds pursuant to that Facility.
(c)The mortgage made between the plaintiffs and the mortgagor.
(d)The obligation of the mortgagor to make payments pursuant to the terms of the mortgage to the plaintiffs.
(e)Default by the mortgagor following written demand for repayment by the plaintiffs.
(f)The execution of the DGI by the defendants, agreeing to make payment to the plaintiffs of the moneys secured.
(g)Written demand by the plaintiffs to the defendants for payment of moneys owed by the mortgagor.
(h)Failure by each defendant to pay to the plaintiffs the moneys demanded.
By their defence:
(a)The defendants admit the loan facility;
(b)They deny the advance to the mortgagor in the sum alleged;
(c)They admit the mortgage;
(d)They deny default under the loan agreement and the mortgage and they deny that in the events that occurred the plaintiffs were entitled to make written demand on the mortgagor for repayment;
(e)They admit the failure by the mortgagor to pay to the bank the sum demanded;
(f)The defendants do not admit the DGI and its terms;
(g)The defendants deny the failure by the mortgagor to pay the sum claimed as due and payable to the plaintiffs;
(h)The defendants deny breaches of obligations under the DGI;
(i)In paragraph 3 of the defence issue was raised as to the enforceability of the DGI, as to uncertainty in expression in the deed and as to the circumstances of its execution;
(j)In paragraph 4 it is denied that the amounts allegedly advanced to the mortgagor were advanced.

Thus far the pleadings indicate an identity in issues for each of the plaintiffs.
However the defence then goes on to assert in paragraph 7 that the first plaintiff procured the defendants’ execution of the DGI by its misleading and deceptive conduct, breaching ss 51A, and 52 of the Trade Practices Act 1974 (Cth). It is asserted that the first plaintiff failed to disclose at or around the time that it induced the guarantors to enter into the DGI that it was insolvent or that it was about to become insolvent, and that it was unlikely to be in a position to meet in full its contractual obligations to the mortgagor under the mortgage and loan facility or to the guarantors under the DGI. This assertion of misleading and deceptive conduct is directed only at the first plaintiff and not Equity Trustees. Mr Carroll nevertheless submits the two plaintiffs were joint promisees and that a defence available against one joint promisee would defeat the claim brought by the other. Mr Carroll cited the dicta of Finkelstein J in Financial Industry Complaints Service Limited v Deakin Financial Services Pty Limited (2006) FCA 1805 at [67] in support of this submission. Mr Condon who appeared before me in the interests of the second plaintiff submitted otherwise, relying upon the decision of Branson J in Krambousanos v Jedda Investments Pty Ltd (1996) 64 FCR 348. Mr Condon referred me to the decision in Brewer v Westminster Bank Ltd [1952] 2 All ER 650 which may tend to support Mr Carroll’s submission, but Mr Condon also referred to later cases in which Brewer was not followed: Ardern v Bank of New South Wales [1956] VLR 569 and Catlin v Cyprus Finance Corporation (London) Ltd [1983] QB 759.
The competing submissions advanced by Mr Carroll and by Mr Condon give rise to an issue of some complexity and it would be altogether inappropriate to attempt to determine this issue in the present application for security for costs. The issue will require determination having regard to the matters arising on the pleadings. The outcome should be determined at a final hearing after all the evidence in point has been introduced and assessed by the Court as then constituted.
Nevertheless it is necessary to consider the significance of this issue, raised discretely against the first plaintiff only, for the purposes of the present application.
The allegation of misleading and deceptive conduct is again raised in the cross claim the defendants intend to bring. It is convenient to address its content, not only because it throws light on the issue arising by reason of paragraph 7 of the defence, but also because the pursuit of the cross claim is a factor to be considered in any event in the exercise of the Court’s discretion to order security for costs.
In the proposed cross claim the cross claimants seek:
(1)Declarations
(a)That the cross defendants (the plaintiffs) are joint co-promisees in respect of the loan advance.
(b)That the second cross defendant cannot enforce the DGI, the Loan Agreement and the Mortgage.
(2)Orders as against the first cross defendant Momentum, inter alia setting aside the DGI, the Loan Agreement and the Mortgage.
The cross claim adds as a defendant Brett Gilbert who it is alleged was a director of Momentum who engaged in misleading and deceptive conduct.
It is pleaded that the mortgagor intended to develop land creating 33 lots and common property and that it entered into an agreement with Artone as the builder to undertake the necessary building work. A document described as a tripartite deed was allegedly executed, a term of which was that Momentum would continue to make available money at the request of the mortgagor to enable the mortgagor to fund its obligations under its contract with the builder so as to allow Artone to complete the work. It is alleged that in May or June 2007 Momentum represented to the mortgagor that it would provide finance to the mortgagor to complete the works. Whilst it could only provide finance to borrowers for 12 months at a time, it is alleged that a further representation was made by Momentum in August 2007 that it would provide financial accommodation to the mortgagor to enable the completion of the work and that the term of the loan would be rolled over on 26 June 2008. These representations it is pleaded enliven s 51A of the Trade Practices Act. It is pleaded that Momentum did not have reasonable grounds for making the representations having regard to its financial position at times relevant to the making of the representations.
It is unnecessary for present purposes to refer to the detail of the pleading against the third cross defendant.
Where substantially the same issues are likely to arise on an action brought by an impecunious company against a defendant as on a cross action brought by the defendant against the impecunious company, the Court should be slow to order security: see Sydmar Pty Ltd v Statewise Developments Pty Ltd (supra) and Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd [1998] NSWSC 472; and [1999] NSWCA 16.
In his judgment at first instance in Dalma Rolfe J said at page 9:
"In circumstances where the claim and the cross claim arise out of the same, or essentially the same, factual matrix this, in my opinion, is a very important consideration. It has been frequently and consistently said by Judges sitting in this Division that an order for security will not generally be made in such circumstances, in the exercise of the Court's discretion. It would, in my view, be quite wrong to preclude a party from litigating matters by way of a defence to a cross claim merely because that party has been the initial institutor of the proceedings. The conduct of the other party may have forced the allegedly impecunious party to take the litigious initiative, whilst not constituting misconduct. Put simply if [Concrete] seeks to recover any part of the debt the issues raised by Dalma in its claim would be available to it as a defence, and there has never been any suggestion that a party could be precluded from defending proceedings, where the defence is bona fide, by reason of impecuniosity. It is, therefore, a somewhat arid exercise to be considering an application for security for costs if the plaintiff can be cast in the role of a defendant and can litigate the very matters the subject of its claim by way of defence."
On appeal Sheppard AJA, with whom the other members of the Court of Appeal agreed, cited the above dicta with approval. Sheppard AJA said (at paragraph 24):
“…But as Rolfe J said in the paragraphs from his judgment which I have quoted, the fact that a claim and a cross-claim arise out of the same, or essentially the same, factual matrix is a very important consideration.
He added that it would be quite wrong to preclude a party from litigating matters by way of defence to a cross-claim merely because that party was the initial institutor of the proceedings. I entirely agree with what Rolfe J has said. He concluded this part of his judgment by saying that it was a somewhat arid exercise to be considering an application for security for costs if the plaintiff could be cast in the role of a defendant and could litigate the very matters the subject of its claim by way of defence. Plainly he would have taken a different view if there had been an undertaking given on behalf of Concrete not to prosecute its cross-claim.”
There is here an overlap of the issues that will arise on the cross claim and on the defence to the plaintiffs’ action, a common factor in both matters being the allegations of misleading and deceptive conduct pleaded in both the defence and the cross claim. However, unlike the situation in Dalma, the defendants in this case gave instructions to Ms Georgiou that they would not pursue their cross claim against Momentum if an order for security for costs was made in their favour and not satisfied (see the affidavit of Ms Georgiou sworn 3 May 2010). On the hearing of this application Mr Carroll gave an undertaking to the Court to the same effect. Absent such an undertaking I would not have been minded to order any security in this case. However upon that undertaking being given I am not disposed to refuse to make an order for security for costs against Momentum by reason of the cross claim which the defendants seek to pursue.
Nevertheless Equity Trustees is well able to satisfy any order for costs made against it should the plaintiffs’ claim against the defendants fail. If Mr Carroll’s submission is correct, the defence to the plaintiffs claim based upon the alleged misleading and deceptive conduct of Momentum, would if successful defeat not only its claim under the DGI but also the claim of Equity Trustees, because, it is contended, joint claims cannot be split and a joint promisee has no several right of action. The issue this contention raises must be determined at trial, but whether Mr Carroll is correct or not, should the defendants obtain the benefit of a security for costs order against Momentum when they are contending the claim of Equity Trustees as well as that as Momentum will be defeated by Momentum’s misconduct? If the defence prevails, and if Mr Carroll’s submission is successful, both plaintiffs would fail and costs would ordinarily follow the event. Hence the defendants could look to Equity Trustees to satisfy a costs order in their favour unless an order is made following trial which would make the impecunious plaintiff solely responsible for the defendants costs.
Mr Carroll submitted that since it is not alleged by the defendants that Equity Trustees was engaged in any wrongdoing as it did not mislead or deceive, the Court having made a finding to that effect may very well order that Momentum only should pay the defendants costs. Mr Condon for Equity Trustees supported that submission.
Of course costs need not necessarily follow the event. This is specifically recognised in the expression of r 42.1 of the Uniform Civil Procedure Rules 2005:
“Subject to this part, if the Court makes any order as to costs, the Court is to order that the costs follow the event unless it appears to the Court that some other order should be made as to the whole or any part of the costs.”
It is not possible to predict the outcome of this litigation or the costs order that will ultimately be made. It is possible if the outcome is determined by a finding that Momentum did mislead and deceive that Momentum alone would be ordered to pay the defendants’ costs of the proceedings.
I have concluded that I should make an order for security for costs in this case. However the alleged misleading and deceptive conduct by Momentum is not the only defence raised to the claim by the plaintiffs. If the plaintiffs’ claim fails by reason of defences pleaded in paragraphs 3-6 of the defence filed, then the defendants could expect to obtain an order for costs against both plaintiffs, and I consider that I should bear this in mind when determining the amount for which security ought to be given. I am mindful too of Mr Pritchard’s submission that the Court may ultimately make differing orders for costs against the first and the second plaintiffs should they lose. It may for instance order the first plaintiff to pay x% of the defendants’ costs, and the second plaintiff to pay y%.
In his affidavit filed in support of the defendants’ application Mr Levitt opined that the likely recoverable costs incurred in these proceedings would be around $200,000. In his affidavit filed on behalf of the first plaintiff, Mr Miller opined that the “reasonably likely costs” of the defendants in these proceedings would be $84,296.25. During the hearing of this application, the parties agreed that the defendants’ party and party costs for defending the proceedings against both plaintiffs would amount to $140,000, which sum does not include any costs incurred in prosecuting the cross claim. In the circumstances of this case I consider it appropriate that the first plaintiff should provide security only for a proportion of that sum and that the first plaintiff should be required to give security for 60% of that figure.
Costs of this application should be costs in the cause.
Formal orders
Having noted the undertaking by the defendants referred to in paragraph 40 above I make orders as follows:
1.By consent leave granted to the defendants and Ezcape St Projects Pty Ltd to file a cross claim in these proceedings.
2.The cross claim is to be filed and served within 21 days from today.
3.Order that the first plaintiff provide security for the first and second defendants’ costs of and incidental to defending the proceedings, in a form acceptable to the registrar as follows:
(a)Within 28 days in the sum of $14,000.
(b)Not less than 42 days prior to the hearing date appointed, in the further sum of $70,000.
4.Costs of the application are to be costs in the cause.
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LAST UPDATED:
1 September 2010