Saafin Constructions Pty Ltd (in liq) & Ors v Mag Financial and Investment Ventures Pty Ltd & Ors (Costs and Orders)
[2021] VSC 702
•28 October 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
TECHNOLOGY, ENGINEERING & CONSTRUCTION LIST
S CI 2018 01685
| HASSAN EL-SAAFIN and others | Plaintiffs |
| v | |
| MARK FRANEK and others | Defendants |
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JUDGE: | Riordan J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 27 September 2021 |
DATE OF JUDGMENT: | 28 October 2021 |
CASE MAY BE CITED AS: | Saafin Constructions Pty Ltd (in liq) & Ors v MAG Financial and Investment Ventures Pty Ltd & Ors (Costs and Orders) |
MEDIUM NEUTRAL CITATION: | [2021] VSC 702 |
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MORTGAGES – Assessment of interest that would have been paid by plaintiffs to substitute financier if tender had been accepted.
DECLARATION – Declaration sought by receivers about entitlement to indemnity – Liability to indemnify admitted – Relief refused.
COSTS – Principles relating to issues based costs orders and costs orders after award of nominal damages.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr I W Upjohn QC with Mr B G Mason | Hicks Oakley Chessell Williams |
| For the Second and Third Defendants | Mr J Kohn | Capstone Koroneos Legal |
| For the First, Fourth and Seventh to Tenth Defendants | Mr S B Rosewarne with Ms V Bell | Holding Redlich |
Contents
Interest payable to a substitute financier
Submissions
MAG Parties’ submissions
Plaintiffs’ submissions
Conclusion
Receivers’ counterclaim
Costs
Submissions
Plaintiffs’ submissions
MAG Parties’ submissions
Receivers’ submissions
Conclusion
Principles in relation to costs
Costs as between the plaintiffs and the Receivers
Costs as between the plaintiffs and the MAG Parties
Orders
HIS HONOUR:
On 13 August 2021, I published my reasons in this proceeding and various related proceedings.[1] The terms adopted in the glossary to the Reasons are used in these reasons.
[1]Saafin Constructions Pty Ltd (in liq) v MAG Financial and Investment Ventures Pty Ltd [2021] VSC 489 (‘Reasons’).
The proceedings principally arose out of a dispute between:
(a)Saafin Constructions Pty Ltd (‘the Company’), being the developer of a partly completed development of a four storey building containing 25 dwellings and two commercial tenancies (‘the Development’) at 65-67 Arden Street, North Melbourne (‘the Arden Street Property’);
(b)the assignee of the Company’s financiers, being the fourth defendant (‘MAG Financial’); and
(c)the receivers and administrators appointed by the Company’s financiers, being the second and third defendants (‘the Receivers’) and the fifth and sixth defendants.
In particular, the Company disputed the transfer of the Arden Street Property to the seventh defendant (‘AAGG’) by MAG Financial as mortgagee in possession.
Relevantly for present purposes, in the Reasons I concluded, in summary, as follows:
(a)The Second Franek Loan Agreement is unenforceable under s 39 of the Consumer Credit (Victoria) Act 1995 (Vic) (‘the Consumer Credit Act’).
(b)As a result, the appointment of the Receivers under the Franek GSA was invalid and the Receivers had trespassed on the Arden Street Property. The Receivers were not entitled to relief under s 419 of the Corporations Act2001 (Cth), but the Company had not proven any damage and it was therefore only entitled to nominal damages.
(c)Further, as a result of circumstances surrounding the sale of the Arden Street Property, referred to in the Reasons as ‘the Arrangement’,[2] the sale of the Arden Street Property should be set aside because it:
(i)was in breach of MAG Financial’s duty as mortgagee under s 77 of the Transfer of Land Act1958 (Vic); and
(ii)constituted unconscionable conduct by MAG Financial and AAGG in contravention of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (‘the ASIC Act’).
(d)Prior to the transfer of the Arden Street Property, MAG Financial refused to accept proposed tenders of the amounts due under the Balanced Facility Agreement and the Second Franek Loan Agreement from the Company.
(e)As a result of the refusal of the proposed tenders, the Company’s obligation to pay interest under the Balanced Facility Agreement was limited to the amount of interest which it would have paid under its refinancing facility until that amount would have been repaid from the proceeds of the sale of units in the Development.[3]
[2]See Reasons [426].
[3]Reasons [358]-[359].
In summary, in these reasons I find that:
(a)the interest that the Company would have paid to a substitute financier under a refinancing facility until repayment of that facility would have been $585,000;
(b)the plaintiffs and the Receivers should each bear their own costs of the proceeding; and
(c)MAG Financial and AAGG should pay 75% of the plaintiffs’ costs of the proceeding.
Interest payable to a substitute financier
In the Reasons, I made a preliminary assessment of the amount of interest that the Company would have paid to a substitute financier under a refinancing facility until repayment of that facility, being $585,000. My preliminary assessment of this amount was set out as follows:
In my opinion, a fair estimate of the amount of interest that the Company would have paid to the substitute financier prior to repayment after 14 months is $585,000, calculated as follows:
(a)$540,000, being $45,000 per month for 12 months prior to the settlement of the sale of the first four sold units; and
(b)a total sum of $45,000 over the 13th and 14th months, during which time the Company could have applied $2 million per month, from the settlement of sale proceeds, in satisfaction of the refinance amount.
The allowance of 14 months for the repayment of the refinanced amount is based on the following evidence and findings:
(a) The total amount borrowed under the refinancing facility from Black Arrow Mortgages for the purpose of refinancing the Balanced Mortgage would have been approximately $3.6 million (at an interest rate of 15%) made up as follows:
(i)$3,265,742.82, being the amount payable under the Balanced Mortgage as at 26 June 2018; plus
(ii)$325,600 inclusive of GST, being borrowing costs for the refinancing facility of $296,000 plus GST (including establishment fee of $150,000, legal fees of $10,000, administration fee of $25,000, brokerage fee of $100,000, valuation fee of $5,000, and acceptance fee of $6,000).
(b)The time for the construction of the Development to reach practical completion would have been approximately nine months. This was the time period estimated by Napier & Blakeley to achieve practical completion of the Development, from the time of cessation of works at the end of March 2018 (being the period from 28 March 2018 to 4 December 2018).
(c)An additional three months should be allowed for:
(i)the building work to resume; and
(ii)a period after practical completion, before settlement of the sold units would commence.
(d)After a further two months, the proceeds of sale of sold units would have allowed repayment of the financed amount, because the gross monthly proceeds from the sale of units, after the expiration of 12 months, would have averaged approximately $2 million. This conclusion is based on the following uncontested evidence of the MAG Parties’ expert valuer, Mr Rann:
(i)The realisable value of the sale of the units in the Development net of GST was $12,796,837, which is an average value of $511,873.48 for each of the 25 units (before deduction of sale costs).
(ii)The probable rate of sales of units in the Development would be four units per month commencing three months after practical completion.
This would result in an expected gross average monthly revenue from sales of $2,047,493.92 (before deduction of sale costs). After reduction for sale costs and other expenses, I have allowed the amount of $2 million per month as available to repay the refinanced amount. Therefore, the refinanced amount would be repaid in approximately two months, after the commencement of settlement of sold units.
In undertaking this assessment, I have taken into account the unchallenged evidence of Hassan with respect to his experience as a builder and the likely requirements for completion of the Development. Of course, the assessment is necessarily imprecise but that does not relieve the Court from the responsibility of undertaking it. As Mason CJ and Dawson J observed in Commonwealth v Amann Aviation Pty Ltd:
The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can. Indeed, in Jones v. Schiffmann Menzies J. went so far as to say that the ‘assessment of damages ... does sometimes, of necessity involve what is guess work rather than estimation’. Where precise evidence is not available the court must do the best it can.[4]
[4]Ibid [360]-[362] (citations omitted).
The above assessment was made on the evidence before me at trial; but without the assistance of submissions from counsel as to the calculation. Accordingly, the conclusions I expressed were preliminary, and I stated:
The parties did not have the opportunity to make submissions about the above calculations and accordingly, I will hear the parties on the question of whether I should make orders based on the above assessment.[5]
[5]Ibid [363].
On 27 August 2021, I directed the first, fourth and seventh to tenth defendants (‘the MAG Parties’) and the plaintiffs, to file written submissions regarding the appropriate amount of accrued interest they contend that the Company would have been obliged to pay to a substitute financier under its refinancing facility.
Submissions
MAG Parties’ submissions
The MAG Parties submitted that, on the limited evidence at trial, it is likely to take longer than the 14 months referred to in the Reasons for the Development to be completed and for sufficient units to be sold to repay the refinanced loan. The MAG Parties argued that the ‘best estimate’ is a period of at least 18 months, for the following reasons:
(a)The process of engaging a new builder to complete the Development would have extended the time of nine months to reach practical completion, as estimated in the Napier & Blakely Report dated 28 March 2018 (‘the Napier & Blakely Report’), which was premised on a ‘significant increase in productivity’ and on the works being completed by the existing builder, New Concept Homes Pty Ltd (‘the Builder’).
(b)The Napier & Blakely Report made no allowance for rectification works. Part 2.7 of the Building Inspection Report prepared by the BSS Group on 20 April 2018 stated:
Unfortunately, there have been considerable defects reported in the accompanying Defects report. Serious problems exist with the external wall cladding and framing that will require major or complete demolition and reconstruction to rectify. The levels affected by these issues includes level 1, 2 and 3.
(c)The valuation report of Mr Christopher Rann dated 6 June 2018 exhibited to Mr Rann’s witness statement dated 9 December 2020 (‘the Rann Report’) stated that Napier & Blakely ‘forecast optimistic timelines’. The Rann Report estimated settlements commencing in ‘month 16’, and included the following assumptions:
The QS [Napier & Blakely] forecast optimistic timelines, however now that the construction has stalled we assume the buyer will experience a lead time before settlement and access onto the site. Our Financial Feasibility Model includes the following assumptions:
Ø Six (6) months lead-in following land settlement. Realistically, all projects experience a lead-in even in the circumstances of all issues being resolved.
Ø Eight (8) months construction (to complete and assuming the contracted builder is legally obliged to finalise the project).
Ø We have estimated a probable rate of sale of 4 x units per month post completion.
Ø Settlements from month 16 for 7 months.
(d)An allowance of time should be made to obtain further permits, which the Napier & Blakely Report stated were required to complete the Development and sell the units.
(e)The refinancing offer from Black Arrow Mortgages was subject to the removal of caveats on the Arden Street Property. Accordingly, the Company would have had to remove the caveats lodged by Mr Al-Zubeidi on 17 April 2018 and Property Capital Pty Ltd on 25 May 2018 before it could have obtained finance.
(f)From 6 April 2018, the Builder and the Company entered into the Standstill Agreement, pursuant to which the injunction proceeding commenced by the Builder was put on hold while this proceeding was heard and determined.
Plaintiffs’ submissions
The plaintiffs submitted as follows:
(a)The allowance of a construction period of nine months based on the Napier & Blakely Report was conservative for the following reasons:
(i)There was no evidence that the Builder was not able to generate a ‘significant increase in productivity’ had Mr Mekkya directed his attention towards completing the Development.
(ii)There was no evidence that the Company did not have sufficient funds available under the Balanced Facility Agreement to complete the Development.
(iii)An allowance of nine months is more generous to the MAG Parties than the eight month construction period referred to in the Rann Report.
(b)The allowance in the Rann Report of a six month lead-in period should be rejected for the following reasons:
(i)It was based on his company’s ‘Financial Feasibility Model’ and there was no explanation as to why the period is appropriate.
(ii)Mr Rann’s evidence is mathematically incorrect in that the conclusion that the settlement of apartments would begin in ‘month 16’ is not consistent with his lead-in period of six months and his construction period of eight months, which total only 14 months.
(c)Mr Blackney’s evidence was that funds advanced could have been applied to remove existing caveats and mortgages. Further, his letters of offer starting at $5 million in June 2018 and increasing to $9 million in March 2020 demonstrate a preparedness to finance up to $9 million in April 2020, which would have been sufficient to pay out the Balanced Mortgage and complete the Development.
(d)The Standstill Agreement should be of no significance to the construction period because:
(i)it was put in place while the parties sought to negotiate a settlement; and
(ii)rather than negotiate in good faith, the MAG Parties utilised the breathing space to start implementing the Arrangement by assigning debts, registering MAG Financial and appointing the Receivers pursuant to the Franek GSA.
Conclusion
I consider my preliminary assessment of 14 months from the end of June 2018 until the repayment of the substitute financier to be reasonable. It allows approximate periods of:
(a)two months for the lead-in period and for contingencies;
(b)eight months to achieve practical completion of the construction works;
(c)two months from the achievement of practical completion until the commencement of settlements; and
(d)two months from commencement of settlements for the repayment of the substitute financier.
There is no dispute about:
(a)the allowance of two months from the achievement of practical completion until the commencement of settlements; or
(b)the allowance of two months from commencement of settlements for the repayment of the substitute financier based on:
(i)the rate of sales thereafter; and
(ii)the likely revenue from such sales.[6]
However, the MAG Parties contended that the allowance, in the preliminary assessment, of a period of 10 months from the end of June 2018 until the achievement of practical completion was insufficient.
[6]See Reasons [361(d)].
In my opinion, the allowance of 10 months from the end of June 2018 to achieve practical completion, being a two month lead-in period and an eight month construction period, is fair, for the following reasons.
With respect to the eight month construction period, I have had regard to the following:
(a)Hassan’s evidence was that he has been a qualified builder for almost 20 years, and has been responsible for managing and carrying out numerous domestic and commercial building projects. He estimated that it would ‘take approximately 7 months to complete the project (including to rectify defects)’. His estimate was supported by an appendix detailing the eight stages to be completed in a ‘Schedule of Tasks to be Completed’. The total of the periods to complete the eight tasks was 30 weeks. In cross-examination, Hassan was challenged about whether his estimate provided for the rectification of defects. His response was that he had allowed for it in his estimate. His evidence was otherwise uncontradicted and unchallenged.
(b)In the Napier & Blakely Report, the forecast completion date was 4 December 2018, being a period of eight months and one week. The Napier & Blakely Report stated that:
(i)for the forecast completion date to be achieved, ‘a significant increase in productivity is required’;
(ii)further building permits would be required before completion; and
(iii)the recommendation for the payment of the relevant progress claim was ‘prepared on the basis that the work has been carried out to the satisfaction of the supervising consultants and we have made no allowance for demolition of unsatisfactory work or rectification thereto’.
(c)I do not consider that the issues referred to in sub-para (b) above support an extension to the Napier & Blakeley forecast, for the following reasons:
(i)The Napier & Blakely Report recorded that:
(1)the projected practical completion date under the Building Contract had been delayed by seven months;
(2)since the previous report, the projected practical completion date had been delayed by one month; and
(3)the Company was considering terminating the Building Contract with the Builder.
(ii)Further, the Napier & Blakely Report was prepared for the purposes of providing a recommendation to the construction financier, Balanced Securities, for a Construction Progress Certificate. Accordingly, if Napier & Blakely had considered that any of the issues were likely to have a material effect on the completion date, it is likely Napier & Blakely would have so stated.
(d)The MAG Parties’ expert valuer, Mr Rann, adopted an eight month construction period. However, in valuing the property he ‘assume[d] the buyer will experience a lead time before settlement and access onto the site’. He stated that his ‘Financial Feasibility Model’ included the following assumption:
Six (6) months lead-in following land settlement. Realistically, all projects experience a lead-in even in the circumstances of all issues being resolved.
(e)The adoption of the Financial Feasibility Model was based on Mr Rann’s opinion that it was appropriate to adopt the hypothetical subdivision approach to determine the value of the property. Mr Rann did not explain why it was appropriate to assume a six month lead-in time, which was applicable to the valuation of subdivisions, for the recommencement of work on the Development. I do not accept that it is a justifiable assumption. While some allowance must be made for building work to recommence on the Development after the end of June 2018, a six month lead-in time would not be consistent with the uncontradicted and unchallenged evidence of Hassan as to the Company’s capacity to take over and complete the work promptly.
There is no evidence that the completion of the Development would have been delayed by the other matters referred to by the MAG Parties, for the following reasons:
(a)The Standstill Agreement was entered into on 6 April 2018. There was no evidence that the Builder sought to, or could have maintained, the Building Contract after the end of June 2018.
(b)I do not think that there is any basis upon which I could infer that the Company would not be able to raise construction finance, for the following reasons:
(i)There was no evidence, and it was not put to the plaintiffs’ witnesses, that the Company would not be able to raise construction finance to complete the Development.
(ii)The uncontradicted evidence of Hassan, which was supported by detailed calculations, was that the cost to complete the project (including to rectify defects in the Builder’s work) was approximately $3.2 million (including GST), estimated on the basis that the Company would not charge a builder’s margin.
(iii)The Napier & Blakely Report projected the cost to complete at $4,369,070 (excluding GST); but presumably this included a builder’s margin.
(iv)Black Arrow Mortgages approved loan finance up to $9 million in June 2019.
(v)The Rann Report valued the completed Development at $13,813,500.
In the circumstances, after having the benefit of submissions from counsel, I am satisfied that my preliminary assessment of $585,000 represents a fair estimate of the amount of interest that the Company would have paid to the substitute financier prior to repayment after 14 months.[7]
[7]See Reasons [360].
Receivers’ counterclaim
By their counterclaim filed 1 November 2020, the Receivers sought the following relief against the Company and Wael:
A.A declaration that the Receivers are not liable for any loss or damage suffered by the Plaintiffs pursuant to the [Balanced Facility Agreement] and/or the [Franek GSA].
B.Further and in the alternative, a declaration that Company and/or Wael are bound to indemnify the Receivers pursuant to the [Balanced Facility Agreement] and/or the [Franek GSA] for any loss and damage suffered by the Plaintiffs.
C.An order that any loss and damage suffered by the Plaintiffs caused by the Receivers be set off against any money it is found the Company and/or Wael are liable to indemnify the Receivers.
D.A declaration that the Company and Wael are responsible for the Receivers’ remuneration and expenses incurred pursuant to the [Franek GSA] and the [Balanced Facility Agreement].
As set out in the Reasons, the Receivers are not entitled to the relief sought under the Franek GSA.[8]
[8]Reasons [223].
However, the validity of the Balanced Facility Agreement was not contested in this proceeding. In particular, by the plaintiffs’ defence to counterclaim filed 25 January 2021, the Company and Wael admit the terms of the Balanced Facility Agreement, including cl 18.1, which provides as follows:
[The Receivers are] entitled to be indemnified by [the Company], and out of the Secured Property, in respect of all liabilities and expenses incurred by it or such person in the execution or purported execution of any of the powers, authorities or discretions vested in it or such person under, or under the Corporations Act 2001 in respect of, this Deed and against all actions, proceedings, costs, claims and demands in respect of any matter or thing done or omitted in any way relating to the Secured Property. The … Receiver may obtain and pay out of any moneys in its or his or her hands arising from the powers in this Deed all sums necessary to give effect to this indemnity.
Apart from orders for costs, the Receivers also seek a declaration that they are entitled to an indemnity from the Company for their costs and expenses of the proceeding, and their reasonable remuneration, pursuant to cl 18.1 of the Balanced Facility Agreement.
As there has been no dispute as to the Receivers’ entitlement under cl 18.1 of the Balanced Facility Agreement, I do not propose to make any such declaration.
The Company does not dispute the Receivers’ entitlement to remuneration for their work under the Balanced Facility Agreement for the period from the commencement of their employment on 7 May 2018 until completion of the sale of the Arden Street Property on or about 23 July 2018.[9] However, the extent to which the Receivers’ claims for remuneration and other expenses from that date fall within the ambit of cl 18.1 of the Balanced Facility Agreement as opposed to, in particular, the Franek GSA, is a matter to be determined between the Receivers and the Company’s liquidator.
Costs
Submissions
[9]See Reasons [80] as to the date of the sale of the Arden Street Property.
Plaintiffs’ submissions
The plaintiffs submitted that their costs should be paid by the MAG Parties as to 75%, and the Receivers as to 25%, for the following reasons:
(a)The plaintiffs were overwhelmingly successful on all of the substantial issues.
(b)The Receivers were found to have been invalidly appointed under the Franek GSA and to have trespassed on the Arden Street Property.
(c)The fact that the Court only awarded nominal damages in respect of the trespass claim should not disentitle the plaintiffs to an order for costs in circumstances where the Court found that two insolvency professionals did not believe, on reasonable grounds, that they had been properly appointed.
(d)The plaintiffs were substantially successful, particularly having regard to the interlocking nature of the disputed issues in this proceeding. In particular, the Court found against the Receivers on most issues they contested, including the issues in respect of which the Receivers supported the submissions of their appointor, MAG Financial.
MAG Parties’ submissions
The MAG Parties submitted that the plaintiffs should only be entitled to 50% of their costs, and that only MAG Financial should be ordered to pay those costs, for the following reasons:
(a)The plaintiffs’ success turned on the Court’s findings with respect to the applicability of the Consumer Credit Act, and the consequence of those findings for the enforceability of the Second Franek Loan Agreement and the Franek GSA. This claim was not introduced until the third day of the trial, after the parties had completed their opening submissions.
(b)The plaintiffs’ claims all related to steps taken by MAG Financial to enforce its alleged security rights against the Arden Street Property. Properly characterised, the plaintiffs’ claims were against MAG Financial and not the other MAG Parties.
Receivers’ submissions
The Receivers submitted that:
(a)the Company should pay the Receivers’ costs of the proceeding on:
(i)a standard basis in relation to the Franek GSA; and otherwise
(ii)on an indemnity basis; and
(b)Hassan, Mohamed and Wael should pay the Receivers’ costs of the proceeding on a standard basis.
In support of these contentions, the Receivers submitted as follows:
(a)Although the plaintiffs succeeded on their claim for trespass, where a plaintiff only recovers nominal damages, it is no longer automatically regarded as the successful party for the purposes of costs.
(b)The plaintiffs’ claim for substantial damages for trespass failed.
(c)The plaintiffs were wholly unsuccessful in establishing that the Receivers breached their fiduciary duties.
(d)Although the plaintiffs succeeded in establishing that the Receivers’ appointment pursuant to the Franek GSA was invalid, and that the plaintiffs had validly tendered payment of the amount due under the Balanced Facility Agreement, the Receivers were successful in establishing that:
(i)they did not deprive the plaintiffs of their use and enjoyment of the Arden Street Property;
(ii)their conduct did not cause any loss or damage;
(iii)they were not obliged to accept the June Tender or the July Tender, or to retire; and
(iv)they did not owe and did not breach any fiduciary duty to the plaintiffs.
(e)Although the plaintiffs enjoyed some success against the Receivers, it has ‘largely been a pyrrhic victory’, and it would be inappropriate to make a broad brush reduction in the Receivers’ entitlement to costs.
(f)The plaintiffs should not have issued this proceeding against the Receivers. The plaintiffs could not establish any loss in relation to the trespass claim, and the progression of the Development was not hampered by the Receivers. In particular, any attempts to progress the Development would have come to an end when the Receivers were appointed under the Balanced Facility Agreement.
(g)The Receivers opposed the plaintiffs’ application for leave to amend their statement of claim with respect to the allegation of a breach of fiduciary duties on the basis that such duties were not known to the law. The plaintiffs persevered with that claim and the Receivers were forced to participate in a lengthy trial.
(h)The Receivers took an appropriate position at trial, and counsel for the Receivers limited his cross-examination to the issue of access to the Arden Street Property, and did not prolong the trial in any way.
With respect to the plaintiffs’ failed claim based on a breach of a fiduciary duty allegedly owed by the Receivers under their appointment pursuant to the Balanced Facility Agreement, the plaintiffs should pay the costs of the Receivers on an indemnity basis in accordance with cl 18.1 of the Balanced Facility Agreement. Although the Court continues to have a discretion in relation to the making of orders for the payment of costs, the provision in that agreement for payment of costs on an indemnity basis is a factor in support of the Court exercising its discretion to make such an award.
Conclusion
Principles in relation to costs
The Court has a broad discretion with respect to the costs of a proceeding, including under the following provisions:
(a)Pursuant to s 24 of the Supreme Court Act 1986 (Vic), the costs of and incidental to all matters in the Court is in the discretion of the Court and the Court has full power to determine by whom, and to what extent, the costs are to be paid.
(b)Section 65C of the Civil Procedure Act 2010 (Vic) empowers the Court to make any order as to costs it considers appropriate to further the overarching purpose, including to make different awards of costs in relation to different parts of a proceeding or up to or from a specified stage of the proceeding.
(c)Rule 63.04 of the Supreme Court (General Civil Procedure Rules) 2010 (Vic) provides:
(1)The Court may make an order for costs in relation to a particular question in or a particular part of a proceeding.
(2)Where the Court makes an order under paragraph (1), the Court shall by order fix the proportion of the total costs of the proceeding which is attributable to the particular question in or the particular part of the proceeding.
Ordinarily, costs will follow the event and a litigant who is substantially successful will be entitled to its costs, in the absence of special circumstances justifying some other order, even if the litigant has not succeeded on all heads of claim.[10]
[10]Chen v Chan (No 2) [2009] VSCA 233, [10] (Maxwell P, Redlich JA and Forrest AJA); GT Corporation Pty Ltd v Amare Safety Pty Ltd (No 3) [2008] VSC 296, [38], [59] (Robson J).
In the exercise of its discretion, ‘the Court is entitled to examine the realities of the case and will attempt to do “substantial justice” as between the parties on matters of costs.’[11]
[11]Chen v Chan (No 2) [2009] VSCA 233, [10].
Accordingly, a reason is required to justify an issues based costs order. In Mickelberg v State of Western Australia, Newnes J, after a careful review of the authorities, concluded with respect to an issues based cost award:
It seems to me, therefore, that the effect of the authorities is that if a successful party fails on some issue, the circumstances may make it reasonable that that party be deprived of their costs of that issue. It is not necessary that the issue concerned was raised unreasonably by the party. But parties should not be dissuaded by the risk of costs from canvassing all issues which might be material to the decision in the case, and unless a particular issue or group of issues is clearly dominant or separable from the balance of the proceedings, or there has been some unreasonable or inappropriate conduct by the successful party in relation to an issue, it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between the issues on which it was successful and those on which it failed.[12]
[12][2007] WASC 140 (S), [43].
The principles with respect to issues based costs orders include the following:[13]
(a)As a general rule, a successful party is entitled to an order for all of its costs of the proceeding, even if it failed to establish one or more alternative heads of claim.
(b)The Court’s discretion permits the Court to make an order with respect to distinct questions or issues in the pleading sense and any part of the proceeding. Where the issues involve a degree of overlap or common facts, which go in separate directions in relation to different issues, it will usually be undesirable to engage in an issue by issue analysis.
(c)The Court, in the exercise of its discretion, may decline to order costs to a successful party if the party failed to establish discrete heads of claims or issues, and may order the successful party to pay the costs of the unsuccessful party with respect to those matters.
(d)It is not necessary for a party seeking an issues based costs order to establish that the issue concerned was raised unreasonably, but it is a relevant consideration.
(e)After taking into account the failed issues, the Court may make a single order that one party pay a proportion of the other party’s costs and avoid cross-orders or particular orders as to costs.
(f)Although the quantum of damages recovered compared to the claim may be a relevant consideration, emphasis should be placed on a failure of discrete claims or issues and the time occupied in relation to them.
[13]See Chen v Chan (No 2) [2009] VSCA 233, [10]; GT Corporation Pty Ltd v Amare Safety Pty Ltd (No 3) [2008] VSC 296, [59].
Where a plaintiff, whose primary purpose is to recover substantial damages, only recovers nominal damages, generally the plaintiff will not be considered ‘the successful party’ in the proceeding.[14] However, in the exercise of its discretion, the Court may order that:
(a)the defendant pay the plaintiff’s costs of the proceeding;[15]
(b)the plaintiff pay the defendant’s costs of the proceeding;[16]
(c)there be an issues based costs order;[17] or
(d)there be no order as to costs.[18]
[14]KSG Investments Pty Ltd v Open Markets Group Ltd (No 2) [2021] VSC 359, [9] (Nichols J).
[15]See, eg, Simply Irresistible Pty Ltd v Couper [2011] VSC 33, [7], [26] (Kyrou J).
[16]See, eg, Gold & Copper Resources Pty Ltd v Newcrest Operations Ltd [2013] NSWSC 345, [32]-[35] (Stevenson J); NCON Australia Ltd v Spotlight Pty Ltd(No 7) [2014] VSC 25, [23] (Robson J).
[17]See, eg, Nicholson v Hilldove Pty Ltd (No 4) [2013] VSC 578, [18]-[28] (Sifris J).
[18]KSG Investments Pty Ltd v Open Markets Group Ltd (No 2) [2021] VSC 359, [14] (Nichols J); Rozenblit v Vainer (No 2) [2019] VSC 366, [35] (Sifris J); Walsh v Kerr [1987] 2 NZLR 166 (Tipping J).
Each case must be determined by reference to its own facts;[19] and reference to the following cases is instructive:
(a)In Gold & Copper Resources Pty Ltd v Newcrest Operations Ltd, Stevenson J did not consider that the plaintiff, who had succeeded on the issue of liability but failed on causation and remedy, had succeeded on a ‘clearly dominant’ issue that would warrant departure from the usual order as to costs.[20]
(b)In NCON Australia v Spotlight Pty Ltd (No 7), Robson J considered that the defendant was the successful party in the litigation and entitled to its costs because there ‘was no alternative or further objective to the proceeding other than the recovery of damages’.[21]
(c)In Nicholson v Hilldove Pty Ltd (No 4), Sifris J said that, although the plaintiff had failed to prove loss, it had been successful on the preliminary question that there was a binding and enforceable agreement.[22] Accordingly, Sifris J ordered that the defendants should pay half of the costs of the determination of the preliminary question.[23]
(d)In Rozenblit v Vainer (No 2), the plaintiff had succeeded in establishing his first claim for unconscionable conduct, but had failed to prove an entitlement to more than nominal damages; and had failed entirely on his second claim.[24] Sifris J ordered that the plaintiff should pay 25% of the defendants’ costs.[25] This conclusion was reached after an evaluation of the circumstances being, in summary, as follows:
(i)Although the plaintiff proved unconscionability on the first claim, he was not regarded as being the ‘successful party’ because he was only awarded nominal damages. However, as the defendants were found to have engaged in unconscionable conduct, Sifris J considered there should be no order as to costs on the first claim.[26]
(ii)Although the defendants were entirely successful on the second claim, Sifris J concluded that they were only entitled to recover half of their costs because of their conduct of the proceeding, including untruthfulness as a witness and non-compliance with discovery obligations.[27]
[19]Nicholson v Hilldove Pty Ltd (No 4) [2013] VSC 578, [28].
[20][2013] NSWSC 345, [32]-[33].
[21][2014] VSC 25, [23].
[22][2013] VSC 578, [1], [26].
[23]Ibid [27].
[24][2019] VSC 366, [9]-[10].
[25]Ibid [3].
[26]Ibid [30]-[35].
[27]Ibid [36]-[43].
Relevant considerations in the award of costs, after an award of nominal damages, have been found to include:
(a)whether the finding of a breach amounts to a vindication of rights of some significance;[28] and
(b)where proof of breach of duty was a substantial and vigorously contested aspect of the case at trial.[29]
[28]Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (No 2) [2011] NSWCA 171, [14] (Hodgson JA, with whom Allsop P and Macfarlan JA agreed).
[29]Simply Irresistible Pty Ltd v Couper [2011] VSC 33, [26] (Kyrou J); Witcombe v Talbot & Olivier (No 2) [2009] WASC 173 (S), [27] (Beech J).
A contractual right to indemnity costs or costs generally does not fetter the Court’s discretion.[30] However, where there is a contractual right for costs to be awarded, including on an indemnity basis, the Court will ordinarily exercise its discretion to reflect the contractual right.[31]
[30]See, eg, Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87, [12]-[14] (Beazley JA, with whom Ipp and Hodgson JJA agreed); Taree Pty Ltd v Bob Jane Corp Pty Ltd [2008] VSC 228, [39]-[44] (Vickery J).
[31]Taree Pty Ltd v Bob Jane Corporation Pty Ltd [2008] VSC 228, [44] (Vickery J) (citations omitted); Chen v Kevin McNamara & Son Pty Ltd [2012] VSCA 229, [8] (Redlich JA, with whom Maxwell P and Robson AJA agreed).
Costs as between the plaintiffs and the Receivers
In summary, with respect to the claims between the plaintiffs and the Receivers:
(a)the Receivers were successful in:
(i)restricting the plaintiffs to nominal damages on the trespass claim;[32]
(ii)dismissing the plaintiffs’ claim for breach of fiduciary duty;[33] and
(iii)resisting the plaintiffs’ claim for refusing the plaintiffs’ tender;[34] and
(b)the plaintiffs were successful in:
(i)establishing that the Receivers were not validly appointed and were not entitled to take possession of the Company’s assets under the Franek GSA;[35]
(ii)resisting the Receivers’ claim for relief under s 419 of the Corporations Act2001 (Cth);[36] and
(iii)dismissing the Receivers’ counterclaim with respect to indemnity for their costs, expenses and remuneration incurred in relation to their appointment under the Franek GSA.[37]
[32]Reasons [295].
[33]Ibid [379]-[380].
[34]Ibid [381].
[35]Ibid [223].
[36]Ibid [299]-[301].
[37]See paragraph 17 above and Reasons [223].
I have concluded that I should make no order for costs as between the plaintiffs and the Receivers because each of those parties were both successful and unsuccessful on substantial issues at trial. In arriving at this conclusion, on the one hand, I have had regard to the following:
(a)The plaintiffs were vindicated in their contention that the Receivers were not entitled to be appointed as receivers under the Franek GSA, and resisted the Receivers’ claim for indemnity. In those circumstances, I do not consider that the Receivers were ‘the successful party’ for the purposes of the trespass claim, for the following reasons:
(i)The validity of the Franek GSA, and therefore the appointment of the Receivers under that instrument, was a substantial issue at the trial in respect of which the Receivers positively engaged in support of the MAG Parties. Although the plaintiffs only recovered nominal damages, there is no evidence that the Receivers were ever prepared to waive their entitlement to indemnity under the Franek GSA. Therefore, the validity of the Franek GSA was a matter that had to be determined as between the plaintiffs and the Receivers.
(ii)The appointment of a receiver is a serious step which frequently leads to irreversible financial consequences.[38] For this reason, it has long been accepted that receivers are responsible for satisfying themselves as to the validity of their appointment. In Harris v Bank of New Zealand,[39] Jagose J stated:
[38]See National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] 1 VR 386, 539-40 (Kaye, Murphy and Brooking JJ) in the context of a court appointed Receiver.
[39][2017] NZHC 2374. In Fatupaito v Harris [2018] NZCA 497, [30] (Winkelmann, Simon France and Wylie JJ), the Court of Appeal referred to the trial judge’s statement of principles with apparent approval, but allowed the appeal on other issues.
It is long accepted receivers are responsible to satisfy themselves as to the validity of their appointment. That is broadly seen a responsibility to affirm the process and subject of appointment.
The appointment of a receiver may be invalid because the security agreement has been issued by the company invalidly… or because it did not extend to the asset in respect of which the appointment was made. Even if the security agreement is valid and does extend to the asset in question, the appointment of the receiver may not be valid, because no event has occurred justifying an appointment or because the appointment was not made in the manner prescribed by the security agreement or the person appointed was disqualified….[40]
(iii)This case presents a very good example of the need for receivers to undertake such responsibility with caution. It was the appointment of the Receivers under the Franek GSA that resulted in Balanced Securities, on 10 April 2018 (the day after the Receivers’ appointment), stating that Balanced Securities ‘will now have no option other than to take over the Project’. For the reasons stated in paragraph 299 of the Reasons, I am not satisfied that the Receivers fulfilled their responsibility to affirm the process and the subject of their appointment.
(b)With respect to the claim relating to the failure to accept the tender, I have had regard to the Receivers’ conduct in failing to take responsibility to correct MAG Financial’s unjustifiable demand for $8,250,990.83 to discharge the Balanced Mortgage, despite being copied into the correspondence of 27 June 2018 in which:
(i)the claim was made by MAG Financial’s solicitors; and
(ii)the Company offered $3,265,742.82 to discharge the Balanced Mortgage.
[40]Harris v Bank of New Zealand [2017] NZHC 2374, [72] (citations omitted), quoting Peter Blanchard and Michael Gedye, Private Receivers of Companies in New Zealand (LexisNexis, 3rd ed, Wellington, 2008) 4.14.
On the other hand, I have also had regard to the following:
(a)I do not consider that the plaintiffs’ claim for breach of fiduciary duty should have been brought. If not for the countervailing factors referred to in paragraph 37 above, I would have ordered the plaintiffs to pay the Receivers’ costs of the fiduciary duty claim on an indemnity basis in accordance with the terms of the Balanced Facility Agreement.
(b)On 9 February 2021, I ordered that the plaintiffs pay the defendants’ costs thrown away by reason of the amendment to the statement of claim, including the costs of 8 February 2021. Rather than requiring a separate taxation of those costs, I have had regard to those costs in deciding that each party should bear their own costs.
Costs as between the plaintiffs and the MAG Parties
The plaintiffs have been substantially successful in their claims against MAG Financial and AAGG. Accordingly, those parties should pay the costs of the plaintiffs’ claims against them.
I do accept the submissions of Mr Rosewarne, who appeared for the MAG Parties, that the wrongful conduct was that alleged and proven against MAG Financial, as assignee of the first, eighth, ninth and tenth defendants.
However, I reject the submission that a costs order should not be made against AAGG. For the avoidance of doubt, I have accepted the plaintiffs’ contention that AAGG was itself guilty of unconscionable conduct in contravention of s 12CB of the ASIC Act. At the time of the transfer of the Arden Street Property, MAG Financial and AAGG had a sole common director, Mr Franek. As the vehicle for the transfer of the Arden Street Property, AAGG was involved in the Arrangement and MAG Financial’s unconscionable conduct.
Accordingly, only MAG Financial and AAGG will be ordered to pay the plaintiffs’ costs.
I propose to order that MAG Financial and AAGG pay 75% of the plaintiffs’ costs of the proceeding, including reserved costs. I consider the reduction appropriate for the following reasons:
(a)As noted above, the liability of MAG Financial and AAGG to the plaintiffs is limited to their costs of those claims. MAG Financial and AAGG should not be liable for the costs incurred with respect to the plaintiffs’ claims against the Receivers.
(b)On 9 February 2021, I ordered that the plaintiffs pay the defendants’ costs thrown away by reason of the amendment to the statement of claim, including the costs of 8 February 2021. Rather than requiring a separate taxation of those costs, I have had regard to those costs in reducing the plaintiffs overall entitlement to 75%.
Orders
I propose to declare as follows:
1. Mortgage AN231395Y registered on Certificate of Title Volume 8614 Folio 340, being the land known as 65-67 Arden Street, North Melbourne (‘the Arden Street Property’) secures the principal owing as at 27 June 2018 of $3,265,742.82 plus interest fixed at $585,000.
2. In selling and transferring the Arden Street Property to the seventh defendant (‘AAGG’), the fourth defendant (‘MAG Financial’) breached its duty as mortgagee under s 77 of the Transfer of Land Act 1958 (Vic) to act in good faith in the sale of the Arden Street Property.
3. In selling and transferring the Arden Street Property to AAGG, MAG Financial and AAGG acted unconscionably in contravention of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth).
4. The Loan Agreement dated 15 January 2016 between the first defendant (‘Mr Franek’), and the fourth plaintiff (‘Wael El Saafin’) and the fifth defendant by second counterclaim (‘Bayda El Saafin’) (‘the Second Franek Loan Agreement’) is unenforceable under s 39 of the Consumer Credit (Victoria) Act 1995 (Vic) (‘the Consumer Credit Act’).
5. The mortgages pursuant to cls 3.1 and 16.1 of the General Security Agreement dated 18 May 2017 and the mortgage pursuant to cl 3.1 of the Deed of Release and Settlement dated 18 May 2017 both between Mr Franek, and Wael El Saafin, Bayda El Saafin and the third plaintiff (‘the Company’) are void under s 40 of the Consumer Credit Act insofar as each relates to the Second Franek Loan Agreement.
6. The Company is not liable under the loan agreement for $1.9 million between the ninth defendant, and the first plaintiff, the second plaintiff and Wael El Saafin.
7. The Company is not liable under the alleged Investment Loan Agreement dated 1 March 2012 between the eighth defendant and the Company.
I propose to order as follows:
8. Instrument of transfer AR272795Q is set aside, and the Registrar of Titles is directed to amend the Register pursuant to s 103(1) of the Transfer of Land Act 1958 (Vic) to record Saafin Constructions Pty Ltd (Receivers and Managers Appointed) (in liquidation) as the registered proprietor of the Arden Street Property.
9. Following the amendment provided in paragraph 8 above, the Registrar of Titles is directed to amend the Register pursuant to s 103(1) of the Transfer of Land Act 1958 (Vic) to record on Certificate of Title Volume 8614 Folio 340:
(a) a mortgage with MAG Financial and Investment Ventures Pty Ltd named as the mortgagee, with the mortgage having an effective date of 31 October 2016, as follows:
MORTGAGE AN231395Y 31/10/2016
MAG FINANCIAL AND INVESTMENT VENTURES PTY LTD
TRANSFER OF MORTGAGE AR000538J 09/05/2018
(b) the following caveats:
Caveator Interest claimed Prohibition Effective date Caveat No. Mohamed Ibrahim Al-Zubeidi Interest as charge Absolutely 17 April 2018 AQ930392G Property Capital Pty Ltd (ACN 158 861 459) Interest as charge Absolutely 25 May 2018 AR062124N Property Capital Pty Ltd (ACN 158 861 459) Interest as charge Absolutely 25 May 2018 AR062185R
10. The second and third defendants are liable in trespass for nominal damages fixed in the sum of $100.
11. The second and third defendants’ counterclaim is dismissed.
12. The counterclaim of MAG Financial, AAGG and the third plaintiff by second counterclaim (‘the Counterclaim’) is dismissed except for the following claims, which are stayed until further order:
(a) the Builder Debt (paragraphs 17 to 18 of the Counterclaim);
(b) the New Concept Designs Debt (paragraphs 19 to 23 of the Counterclaim);
(c) the Further Mekkya Debts (paragraphs 23A to 23C of the Counterclaim);
(d) damages for wrongful termination of the Construction Contract (paragraphs 50 to 55 of the Counterclaim); and
(e) the quantum of any set-off of the above debts and damages (paragraph 56 of the Counterclaim).
13. Subject to the order of the Honourable Justice Lyons made 20 April 2021, MAG Financial and AAGG pay 75% of the plaintiffs’ costs of the proceeding, including reserved costs, such costs to be assessed on a standard basis in default of agreement.
14. Paragraph 9 of the order of the Honourable Justice Riordan made 10 December 2020, and the costs order made 9 February 2021, are vacated.
15. There is liberty to apply with respect to production of duplicate Certificate of Title Volume 8614 Folio 340 and for any further directions relating to the amendment of the Register pursuant to s 103(1) of the Transfer of Land Act 1958 (Vic).
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