The Owners - Strata Plan 64415 v Serman

[2017] NSWSC 806

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

The Owners - Strata Plan 64415 v Serman [2017] NSWSC 806

Hearing dates:

22 February 2017

Date of orders:

16 June 2017

Decision date:

20 June 2017

Jurisdiction:

Common Law

Before:

Walton J

Decision:

The conclusions reached together with the order, proposed orders and directions (save for minor adjustments made with respect to the directions in (3) and (4) below) made by the Court on 16 June 2017 were as follows:

 

(1) Having regard to my findings as to the threshold question and the assessment of discretionary factors, I make an order that the plaintiff provide security for the first and second defendants’ costs in the sum of $180,000. I also propose to make orders for the stay of the proceedings until the security is provided by the plaintiff and, further, orders under s 90 of the Act of the kind proposed by the first defendant in the amended notice of motion (noting that the first defendant proposed alternative orders in that respect).

 

(2) Upon this ruling the defendants should, in the ordinary course, have a favourable costs order for the motions. However, I will reserve to the parties an opportunity to make submissions in relation to that question in the directions below.

 

(3) The defendants shall bring in short minutes of order by 23 June 2017 in conformity with this judgment. The orders should be accompanied by a note identifying whether there exists any dispute as to the proposed orders.

 

(4) In the event of there being no dispute as to the proposed orders, and subject to the satisfaction of the Court as to the terms of the same, the Court will make the orders administratively in Chambers. In the event of a dispute as to the form of the orders, the Court shall make directions for the disposition of that dispute.

 (5) As to costs, the defendants shall file and serve by 30 June 2017 any application for costs of the motions together with a short written submission in support of the same. The plaintiff shall file and serve any submission in reply within 14 days after the service of the defendants’ submissions as to costs. The Court will take further steps or make further directions subject to the terms of those submissions.

Catchwords:

COSTS – application for security for costs – principles– statutory provision -- security for costs sought from an Owners Corporation – strata scheme - threshold question – whether there is reason to believe the plaintiff will be unable to pay the costs of the defendant if ordered to do so – net negative asset position – no real property – limited cash resources – levy history and performance – reasonable time to pay – discretionary factors – prospects for success – impecuniosity – risks – contribution of defendants – quantum – directions

Legislation Cited:

Companies (Vic) Code
Corporations Act 2001 (Cth)
Federal Court Act 1976 (Cth)
Federal Court Rules 1979 (Cth)
Home Building Act 1987 (NSW)
Judiciary Act 1903 (Cth)
Limitation Act 1969 (NSW)
Strata Scheme (Freehold Development) Act 1973 (NSW)
Strata Schemes Management Act 2015 (NSW)
Supreme Court Rules 1970 (NSW)
Trade Practice Act 1974 (Cth)
Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

ACN 105 921 962 Pty Ltd v Wiggett [2012] NSWSC 1526
Beach Petroleum NL v Johnson (1992) 7 ACSR 203
Bhagat v Murphy [2000] NSWSC 892
Brad’s on Tap Plumbing Pty Ltd v Owners – Strata Plan 56443 [2016] NSWSC 512
Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65
Cuong Le v HIH Insurance Ltd (in liq) [2014] NSWSC 1587
De Jong v Carnival PLC [2016] NSWSC 347
Funds First Pty Ltd v Owners Corporation Strata Plan 66609 (No 2) [2008] NSWSC 428
Global Medical Solutions Australia Pty Ltd v Axiom Molecular Pty Ltd [2013] NSWSC 1433
Green Camel Pty Ltd v Urban Ecological Systems Ltd [2017] NSWSC 362
Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744
In the matter of Eastmark Holdings Pty Limited (receivers and managers appointed) and 1 Denison Street Holdings Pty Ltd (receivers and managers appointed; In the matter of Eastmark Holdings Pty Limited (receivers and managers appointed) (subject to a deed of company arrangement) [2015] NSWSC 2071
In the matter of Felan’s Fisheries Pty Limited [2016] NSWSC 1351
Jazabas Pty Ltd v Haddad [2006] NSWSC 559
KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189
Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) (Limited) (1995) 1 VR 150
Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40-584
Livingspring v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93
Narradine Pty Ltd v Mascot Steel and Tools Pty Ltd [2012] NSWSC 385
Nonox Australia v Certain Underwriters at Lloyds Subscribing to Contract No CV0263CGL [2014] NSWSC 221
Owners – Strata Plan No 50530 v Walter Construction Group Ltd [2001] NSWSC 820
Owners Corporation Strata Plan 64970 v Austruc Constructions Ltd [2007] NSWSC 778
Pitcairn Investments Pty Ltd v Burwick March Pty Ltd [1993] FCA 327
Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd (1985) 1 NSWLR 114
Statewide Developments Realty Pty Ltd v the Owners Corporation, SP 77457 [2013] NSWSC 1750
Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317
Treloar Constructions Pty Limited v McMillan [2016] NSWCA 302
Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245

Texts Cited:

Robert P Austin and Ian M Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law, (16th ed, 2015, LexisNexis Butterworths).

Category:

Costs

Parties:

The Owners – Strata Plan No 6441 (plaintiff)
Malcolm Serman (first defendant)
Marcus Jacobs QC (second defendant)

Representation:

Counsel:
M Henry SC (plaintiff)
A Zahra (first defendant)
D Mitchell (second defendant)

  Solicitors:
Shine Lawyers (plaintiff)
Spark Helmore Lawyers (first defendant)
Moray & Agnew Lawyers (second defendant)

File Number(s):

2016/14270

REASONS FOR Judgment

1. By a statement of claim filed on 15 January 2016, The Owners – Strata Plan No 6441 (“the plaintiff”) brought an action for professional negligence against Malcolm Serman (“the first defendant”) and Marcus Jacobs QC (“the second defendant”) (hereafter referred to as “the proceedings”).

2. The plaintiff is an owners corporation for a block of apartments at 48-50 Berriga Road, Bellevue Hill (hereafter referred to as “Vue Point”), constituting a “body corporate” pursuant to s 8 of the Strata Schemes Management Act 2015 (NSW) (“the Act”).

3. The first defendant is an owner of unit 13 at Vue Point (together with his wife, since September 2008), a member of the Executive Committee of the plaintiff and a legal practitioner at Serman & Associates.

4. The second defendant is a legal practitioner practicing as a barrister in New South Wales.

5. By way of an amended notice of motion filed by the first defendant on 22 February 2017 and a notice of motion field by the second defendant on 20 September 2016, the first and second defendant sought security for costs against the plaintiff (hereafter referred to as “the motions”). The applications were brought pursuant to r 42.21(1)(d) of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”). This judgment concerns the motions.

6. The quantum of the security for costs sought by the first and second defendant was $270,000 and $275,000, respectively, or such amount as the Court may consider appropriate.

7. Additionally, the first defendant sought two orders under s 90(2) of the Act and/or the inherent jurisdiction of the Court:

1. An order that any security provided by the plaintiff for the defendants’ costs shall be paid for or contributed to only from contributions levied from lot owners of Strata Plan 64415, other than from the owners of Lot 13.

2. An order that any costs and expenses of the plaintiff incurred in connection with the motions were to be paid for or contributed to only from contributions levied from lot owners of Strata Plan 64415 other than from the owners of Lot 13.

8. On 16 June 2017, the Court announced its conclusions in this matter together with an order, proposed orders and directions, all of which appear at the end of this judgment. These are the reasons for those pronouncements and rulings.

FACTUAL BACKGROUND

9. The following factual summary was derived from the pleadings within the plaintiff’s statement of claim where the pleading was supported by the evidence in these proceedings, unless a contrary indication given by reference to the pleadings per se.

10. Around 2000, Vue Point was constructed by Rahnch Constructions Pty Ltd (“the builder”) on the basis of a contract between the builder and Sharrite Pty Ltd (“the developer”).

11. The contract was subject to implied statutory warranties pursuant to s 18B of the Home Building Act 1987 (NSW).

12. Between 22 November 2000 and 2003, the plaintiff identified defects in the construction of Vue Point. The defects related to, inter alia, cavities, waterproofing of balcony doors and roof membrane installations (“the defects”).

13. In mid-2003, as a result of the defects, the plaintiff made a claim with its insurer, Vero, under a contract of insurance for an indemnity. Vero became the insurer for Vue Point by virtue of transference from Royal & Alliance Insurance Australia Limited as the contract was part of the “Home Owners Warranty Insurance Policy” previously issued on 14 January 1999.

14. On or about 21 January 2004, a letter of decline was sent by Vero with respect to an indemnity under the contract of insurance.

15. In summary, the plaintiff pleaded as follows:

1. On about 17 November, the plaintiff consulted the first defendant and instructed and retained the first defendant in connection with a claim against Vero.

2. In about December 2009, the first defendant instructed the second defendant to prepare an opinion on the merits of commencing proceedings against Vero. This was to, inter alia, advise on time limitation issues regarding any claim the plaintiff had against Vero in relation to any breach of statutory warranties and, if the opinion was favourable, to settle a statement of claim.

3. On 21 January 2010, the six year period of limitation pursuant to s 14 of the Limitation Act1969 (NSW) governing the plaintiff’s claim for a breach of contract against Vero expired by reason of rejection of the claim by Vero. The first defendant failed to commence proceedings against Vero prior to the limitation period expiring and caused or permitted the claim to be time barred. The second defendant failed to determine and advise or warn the plaintiff of the existence of the expiry of the limitation period, thereby causing the claim against Vero to be time barred.

4. On 12 February 2010, the second defendant advised the plaintiff that there would be a reasonably arguable case against Vero in respect of its refusal to indemnify the plaintiff and that it could be made in time. It was pleaded that further advice to that effect was also provided on 8 September 2010.

16. The proceedings against Vero commenced in October 2010 (“the Vero proceedings”). Stevenson J found that the plaintiff suffered damages of $692,010. However, the claim was statute barred pursuant to the Limitation Act 1969 and the proceedings were dismissed. His Honour ordered costs in favour of Vero.

17. The plaintiff contended it was not advised, between the retainers of the first and second defendants and 21 January 2010, that any proceedings against Vero in relation to the breach of the contract of insurance needed to be commenced by 21 January 2010. Further, following the judgment in the Vero proceedings, the plaintiff alleged that it lost all prospects of recovering damages from Vero.

18. The plaintiff sought damages from the first and second defendants for negligence, breach of contract and breach of fiduciary duty. In the latter respect, it was contended that once it became known Vero would raise a time limitation defence, the defendants had a conflict of interest and should have advised that independent legal advice be sought and ceased to act.

19. It was pleaded that professional fees of both the first and second defendants in the Vero proceedings were $1,700,000 and $1,000,000 respectively. The costs awarded to Vero were $485,000.

20. It may be noted that the first defendant filed a defence on 14 June 2016 and the second defendant on 6 September 2016. Having regard to the later discussion of discretionary factors, four aspects of the defence may be noted. First, both the defendants denied in their pleadings that they were retained before the relevant limitation period for the claim against Vero had expired. The first defendant pleaded he was retained on 1 March 2010. The second defendant denied that he received instructions to advise or settle a claim prior to 21 January 2010 and had provided a draft advice on 20 February 2010. He contended he had no duty of care until 2 March 2010. Secondly, the breach of fiduciary duty was denied.

21. Thirdly, it was pleaded by the first defendant that, in early February 2010 the first defendant instructed the second defendant to prepare advice as to whether a proceeding by the plaintiff against Vero would be statute barred and that on 12 February the second defendant advised that there would be reasonable prospects of establishing that a proceedings against Vero would not be statute barred. The second defendant, however, contended that that advice was not requested by the first defendant.

22. Fourthly, the first defendant pleaded, in reliance upon the advice of counsel, that, on 15 September 2009, he sought advice from the second defendant as to whether the Limitation Act applied to any claim to be made against Vero. The second defendant, it was pleaded, advised that it did not apply.

23. The fourth summarised pleading resulted, in part, in the plaintiff preparing an amended the statement of claim (which draft amended is in evidence but not filed). By this amendment, the plaintiff provided, inter alia, further particulars of the instructions given to the defendants prior to the date of the limitation period expired. There has been no answer as yet by the second defendant to the fourth summarised pleading.

RULE 42.21

The Rule

24. The following provisions of r 42.21 of the UCPR featured in the submissions of the parties and are relevant to the disposition of this matter:

r 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

…

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 sub-rule (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,

…

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

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

…

(j) the costs of the proceedings,

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

…

(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.

Scope of Rule 42.21(1)(d)

25. The parties each made submissions as to the motions upon the common basis that r 42.21(1)(d) applied to the application before the Court. However, no submissions were specifically received as to the scope of the provision. Nonetheless, I consider some consideration needs to be given to that topic for two reasons. First, the operation of the sub-rule is confined to a plaintiff that is a “corporation”. Secondly, an owners corporation is not so described under the Act, but rather as a “body corporate” under s 8(1) (where such an entity is mentioned in this judgment it shall be referred to singularly as an owners corporation or collectively as owners corporations).

26. There is no definition of a corporation in the UCPR. However, s 57A of the Corporations Act2001 (Cth) defines the expression as including, for the purposes of that Act, a “body corporate” whether incorporated in the Commonwealth jurisdiction or elsewhere. The coincidence of these provisions would superficially suggest that the plaintiff is a corporation for the purposes of r 42.21(1)(d); but such a conclusion must be tempered in the light of ss 5F(1) and (2) of the Corporations Act.

27. Section 5F of the Corporations Act provides, inter alia, that if a provision of a law of a State declares a matter to be an excluded matter for the purposes of the section in relation to the whole of the Commonwealth legislation, then none of the provisions of the corporations legislation (other than s 5F itself) applies to the State in relation to the matter.

28. Section 8(2) of the Act provides an owners corporation is declared to be an excluded matter for the purposes of s 5F of the Corporations Act in relation to the whole of the corporations legislation. Accordingly, it follows, that the definition of a “corporation” in s 57A of the Corporations Act does not have the direct effect of bringing an owners corporation, such as the plaintiff, within the scope of r 42.21(1)(d).

29. Notwithstanding the aforementioned limitations, there does appear to be a proper basis to proceed in accordance with the approach adopted by the parties. This conclusion is supported by the following considerations:

1. There is a line of authority in this Court applying r 42.21(1)(d) in the case of owners corporations established under the Act, albeit without a particular consideration of the scope of the provision: Funds First Pty Ltd v Owners Corporation Strata Plan 66609 (No 2) [2008] NSWSC 428; Statewide Developments Realty Pty Ltd v the Owners Corporation, SP 77457 [2013] NSWSC 1750 (per Brereton J) and In the matter of Eastmark Holdings Pty Limited (receivers and managers appointed) and 1 Denison Street Holdings Pty Ltd (receivers and managers appointed; In the matter of Eastmark Holdings Pty Limited (receivers and managers appointed) (subject to a deed of company arrangement [2015] NSWSC 2071 (“Eastmark Holdings”) (per Brereton J).

2. In the absence of any contrary intention exposed from the text of the rule or contextually within the UCPR, it is appropriate to construe the meaning of the word “corporation” within the sub-rule consistent with the meaning given to the expression under corporations legislation and at common law (as next described).

3. The common law treats the meaning of corporation as encompassing a body corporate: see Robert P Austin and Ian M Ramsay, Ford,Austin and Ramsay’s Principles of Corporations Law, (16th ed, 2015, LexisNexis Butterworths).

4. As will be discussed later, in the context of the consideration of the judgment of Bergin J in Owners – Strata Plan No 50530 v Walter Construction Group Ltd [2001] NSWSC 820 (“Walter Constructions”), an earlier form of r 42.21(1)(d) applied specifically to body corporates. There does not appear to be an intention to narrow the previous scope of the provision by the drafting of the current sub-rule (see Pt 53 r 2 of the Supreme Court Rules 1970 (NSW)).

30. The first defendant sought orders pursuant to the inherent jurisdiction of the Court. That source of power is available to make security for costs order: see De Jong v Carnival PLC [2016] NSWSC 347 at [48] (per Beech Jones J); Bhagat v Murphy [2000] NSWSC 892 at [5] (per Young J); Cuong Le v HIH Insurance Ltd (in liq) [2014] NSWSC 1587 at [6] (per Brereton J).

Relevant Principles

Rule 42.21(1)(d)

31. The principles applicable to the application of r 42.21(1)(d) were recently considered in Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 (“Cornelius”) at [15]-[20] (per McFarlan) and [56]-[50] (per Ward JA) (with Tobias AJA agreeing with both judgments at [60]). The principles have also been the subject of succinct summary in two distinct judgments of this Court: see In the matter of Felan’s Fisheries Pty Limited [2016] NSWSC 1351 (“Felan’s Fisheries”) at [10] (per Black J) and Green Camel Pty Ltd v Urban Ecological Systems Ltd [2017] NSWSC 362 (“Green Camel”) at [19]-[21] (per Ward CJ at Eq).

32. Those authorities provide the foundation for the following distillation of principles as to the operation of r 42.21(1)(d) in the present matter:

1. The sub-rule poses a threshold question as to whether there is a reason to believe that a plaintiff corporation will be unable to pay the defendant’s costs if ordered to do so: Cornelius at [22] and Green Camel at [19]. The onus falls upon the applicant for security to satisfy that threshold condition: Cornelius at [17] and [56]-[59], Green Camel at [20]; Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [29] (per Beazley JA, with whom Meagher and Barrett JJA agreed).

2. That test has been described as setting a “low threshold” and as being an “undemanding test”: Felan’s Fisheries at [10] and Green Camel at [21].

3. The threshold question requires:

1. a consideration of whether there is a rational basis for the requisite belief that the corporation will be unable to pay in the future the costs of the defendant: Cornelius at [59]; Felan’s Fisheries at [10] and Green Camel at [21]; and

2. a formation of an opinion as to the financial position of the corporation at the time of judgment and immediately thereafter: Green Camel at [19].

4. Where there is a “good reason to believe the corporation will be unable to pay costs at the end of the day, this provides the gateway by which a security for costs may be made”: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [53] (per Einstein J) (“Idoport v NAB”).

5. Once the threshold question is satisfied, the next issue to be considered is whether, in the exercise of the Court’s discretion, security should be granted: Cornelius at [22] and Green Camel at [22] (see also Brad’s on Tap Plumbing Pty Ltd v Owners – Strata Plan 56443 [2016] NSWSC 512 at [10] (per McDougall)).

6. The assessment as to whether a corporation is unable to pay requires a practical and common-sense approach to the examination of the corporation’s financial affairs: see Green Camel at [21] and Treloar Constructions Pty Limited v McMillan [2016] NSWCA 302 at [12] (per Beazeley ACJ). (See also, Livingspring v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93 at [15] (per Maxwell P and Buchanan JA) and Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245 at [28] (per Meagher JA, with whom Beazely JA and Barrett JA agreed)).

33. Further, the relevant inability may be established even if a defendant has a surplus of assets over liabilities, which would be sufficient to meet the relevant costs, if it could only pay those costs if allowed an extended time to realise its assets: see Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 121 (per Waddell J); Beach Petroleum NL v Johnson 1992) 7 ACSR 203 at 205 (per von Doussa J) and Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 (“Street v Luna Park”) at [16] (as per Brereton J). The temporal construct in assessing inability, where there are in fact funds available, has also been applied in Narradine Pty Ltd v Mascot Steel and Tools Pty Ltd [2012] NSWSC 385 at [7] (per Black J); ACN 105 921 962 Pty Ltd v Wiggett [2012] NSWSC 1526 at [8] (per Black J); Global Medical Solutions Australia Pty Ltd v Axiom Molecular Pty Ltd [2013] NSWSC 1433 at [12] (per Stevenson J) and Felan’s Fisheries at [10].

34. The application of these principles in the case of an owners corporation under the Act attracted particular attention in these proceedings.

35. As will be discussed in the later summary of the parties submissions, there was a controversy as to whether, if the evidence disclosed a negative net asset position, the defendant could establish a rational basis for the requisite belief that the plaintiff would be unable to pay, in the future, the defendant’s costs, in circumstances where the plaintiff may, by the striking of levies, potentially redress the negative asset position and by that means meet the expected costs from the proceedings. That debate drew particular attention to the following authorities: Walter Constructions; Owners Corporation Strata Plan 64970 v Austruc Constructions Ltd [2007] NSWSC 778 (“Austruc Constructions”) and Eastmark Holdings.

Discretionary Factors

36. An order for security for costs involves the exercise of discretion by the Court: Green Camel at [22]; Idoport v NAB at [59].

37. The law is now settled that that discretion is unfettered and should be exercised having regard to all the circumstances of the case without any predisposition in favour of the award of security: KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 (“KP Cable Investments”) at 196 (per Beazley J). Notwithstanding the “broad unfettered discretion”, Beazley J set out the “established guidelines” with respect to a security for costs application: KP Cable Investments at 196-198. These discretionary considerations are now reflected, by and large, in the current provisions of r 42.21(1A) of the UCPR (see Green Camel at [23]).

38. In Jazabas Pty Ltd v Haddad [2006] NSWSC 559, Simpson J outlined the general principles to be considered in relation to an impecunious corporation at [47]:

The mere fact that each plaintiff is a corporation which is impecunious is sufficient to activate the jurisdiction. It does not, however, necessarily follow that, by reason of that impecuniosity alone, an order ought to be made. The notes to UCPR 42.21 usefully set out the principles and refer to the authorities. Relevant considerations, drawn from the authorities, are summarised as:

(a) whether the plaintiff’s claim is made in good faith and appears to be reasonably arguable;

(b) the status of the defendant, for example as an insurer of the plaintiff, is a relevant, but not decisive, consideration against the grant of security;

(c) whether the plaintiff's lack of funds has been caused or contributed to by the conduct of the defendant;

(d) whether the plaintiff’s proceedings are merely a defence against "self help" measures taken by the defendant;

(e) whether the making of the order would unduly stultify the plaintiff’s ability to pursue the proceedings;

(f) the extent to which it is reasonable to expect creditors or shareholders (or other persons financially involved in the conduct of the proceedings, for example, litigation funders) to make funds available to satisfy any order for security which is made;

(g) the likelihood of a costs order being made at the conclusion of proceedings and the public interest nature of the litigation.

39. Submissions were made by the parties with respect to the following factors under r 42.21(1A): prospects of success, genuineness of proceedings, the plaintiff’s impecuniosity and whether the plaintiff’s impecuniosity is attributable to the defendant’s conduct (I will return to these discretionary considerations later in the judgment).

RELEVANT PROVISIONS OF LEGISLATION

40. The parties referred to both the Strata Schemes Management Act 1996 (NSW) (“the 1996 Act”) and the Act (notwithstanding that the 1996 Act was repealed effective from 30 November 2016). No submissions were made as to why reliance was placed upon both pieces legislation. An explanation may lie in the fact that a set of financial accounts of the plaintiff, which received particular attention in the proceedings, was for the period ending16 November 2016. These accounts made reference to a sinking fund which was later replaced by a capital works fund under the Act (see ss 69-72 of the 1996 Act). I note the orders sought in the proceedings were sought under s 90 of the Act.

41. In all, there would seem to be very few relevant differences between the two pieces of legislation. Attention shall be fixed upon the Act in adjudicating the present application and in particular, upon the following provisions: ss 8-10, 73-74, 76, 81, 83, 86, 90 and 106.

THE EVIDENCE

42. In short summary, the first defendant relied upon the following:

1. the affidavit of Malcolm John Cameron affirmed on 8 September 2016, which detailed the background to the application for security for costs, the litigation costs already incurred in this matter and the potential litigation costs for the future;

2. a notice of a general meeting of the plaintiff, dated 20 January 2017;

3. minutes of a meeting held on 4 October 2016;

4. an Astercon (a company in construction, fit-out and refurbishments) quotation price of $751,185.00 for remedial and replacement works for Vue Point dated 20 November 2016; and

5. a Shine Lawyers Costs Disclosure Statement.

43. The second defendant relied, in short summary, on three affidavits of Geoffrey Thomas Connellan sworn on 19 September 2016, 9 December 2016 and 13 January 2017, respectively. The affidavits dealt with the plaintiff’s current financial position. The first affidavit in time detailed the background to these proceedings, costs and disbursements incurred to date in the proceedings since 22 January 2016 as well as the estimated future costs. The next affidavit detailed a timeline of the proposed amended statement of claim for the hearing, as well as legal costs incurred from 31 October 2016 to 9 December 2016. The most recent affidavit detailed the plaintiff’s financial position including the plaintiff’s assets as negative $432,412.45 (this was also referred to in the affidavit of Con Kormas sworn 22 December 2016). It also recorded that the legal costs incurred since 31 October 2016 were in excess of $32,000 and the cost of rectification work.

44. In short summary, the plaintiff relied upon the following affidavits:

1. Luke Whiffen affirmed 28 November and 21 December 2016, which described the plaintiff’s case and the legal costs expended.

2. Con Kormas sworn 22 December 2016, which attested that on 30 November 2016, the liabilities of the plaintiff was $432,312. He also gave evidence as to legal costs.

3. Michael Lalji affirmed 2 February 2017, with an annexure being the balance sheet of the plaintiff as at 20 February 2017. Key entries included:

1. the cash bank was about $45,950;

2. the net asset position was negative $422,985.12; and

3. the net owners fund was negative $23,782.59.

SUBMISSIONS

45. The parties identified a number of issues bearing upon the resolution of the motions. The submissions are summarised in turn by reference to each such issue. Given that the plaintiff is defending the motions, its submissions will logically be recorded last in sequence.

46. It was common ground that the first and second defendants were required to show that the plaintiff is unable to pay the costs of the defendants if ordered to do so and when such a ground is enlivened, it is the Court’s discretion to order security for costs.

Is there reason to believe that the plaintiff will be unable to pay the costs of the defendants if ordered to do so?

47. The first defendant outlined several factors said to give rise to an affirmative answer to that question:

1. The creditors of the plaintiff were not being paid as debts became due and payable. Reference was made to the near $30,000 worth of outstanding invoices to multiple creditors as at 16 November 2016. Since November 2016, the debt of $30,000 has been reduced to $10,000.

2. Historically, the lot owners in Vue Point have been slow to pay levies, with the repeated requirement of letters of demand and the threat of legal action to secure payment. The first defendant supported this submission which he described as “levy fatigue” by reference to a record of levies imposed and payments received which was maintained by the plaintiff. This record was titled the “Owner Ledger” (hereafter referred to as “the Owners’ Ledger”). It was contended that the plaintiff had no evidence of prompt payment and that the recovery of costs would be further impeded by the administrative processes involved in raising levies, namely, notices and resolutions, an executive meeting and a general meeting.

3. The failure of the plaintiff to provide the following:

1. an undertaking by the executive committee of the plaintiff to raise a levy to meet a costs order;

2. an undertaking by the lot owners to pay any such levy imposed; and

3. evidence from the lot owners demonstrating a capacity to pay or confirmation of an ability pay within a particular period of time.

4. With respect to the costs order in the Vero proceedings, the evidence revealed the plaintiff negotiated payment to Vero over many months and levied unit holders over many months.

5. The material before the Court established the impecuniosity of the plaintiff. This includes, inter alia, owning no real property and not holding significant cash reserves.

48. The first defendant raised two contentions concerning s 81 of the Act. in this respect. First, the provision, prima facie, does not provide for penalties or punitive consequences in the event of non-compliance. Secondly, a reliance on levies rendered the defendants without recourse against individual lot owners in order to raise the relevant monies.

49. Further, the plaintiff will incur significant costs in carrying out any additional building repairs. No allowance appears to have been made and no levy struck to meet this obligation. This contention was supported by reference to two quotations obtained by the plaintiff.

50. The second defendant submitted that the plaintiff would be unable to meet a costs order by reason of the plaintiff’s financial difficulties, which would be exacerbated by the unpaid costs of rectification work (yet to be undertaken). It was also contended that the ability to impose special levies was not conducive to an ability to pay an adverse costs order.

51. The plaintiff submitted an owners corporation had prescribed powers under the Act for the administration of strata schemes. Accordingly, it is not akin to a private or public corporation with respect to asset accumulation (i.e. not for the benefit of shareholders). It was contended that the Act provided the means by which the plaintiff would pay the defendants’ costs. Particular reference was made to s 86(2A) of the Act which affords the plaintiff a discretion to:

recover as a debt in a court of competent jurisdiction, a contribution not paid at the end of 1 month after it becomes due and payable, together with any interest payable on that unpaid contribution and the reasonable expenses of the owners corporation incurred in recovering those amounts.

52. Further, the plaintiff contended that the lot owners had an extensive record of meeting substantial levies imposed as well as compliance with statutory obligations. It was submitted that the plaintiff had paid almost $1.8 million over a period of about five years, by means of special levies, noting that almost $1 million went to the defendants (costs owed from the Vero proceedings). The same procedure would be adopted in respect of payment of legal costs and expenses in the future. The plaintiff submitted that, on average, the remaining 12 lot owners would be required to pay $45,416.66 in order to pay the defendant’s costs of $545,000 (the total amount claimed in the motions).

53. The plaintiff also relied on its recent satisfaction of the costs order in the Vero proceedings, which was significantly higher than the present security sought.

Application of Case Law

54. The question of the plaintiff’s inability to pay costs and impecuniosity and the capacity to raise levies, as earlier mentioned, gave rise to a contentions regarding three cases, namely, Eastmark, Walter Constructions and Austruc Constructions.

Eastmark and Walter Constructions

55. The first defendant relied upon Eastmark. It was contended that in that matter Brereton J stated that the evidence before the Court showed that the plaintiff's liabilities exceeded its assets "by a very substantial margin" (at [1]). A similar position existed in this case because, absent the right of recourse to “others” (presumably by levy), there would be no ability to raise relevant funds to meet an adverse costs order. In this matter the total assets as at February 2017 was $119,636 (nearest dollar) and the total liabilities was negative $542,622 (nearest dollar). The first defendant pointed to how a trust may or may not have the relevant moneys in it whereas an owners corporation does not necessarily have such funds in its administrative and sinking/capital works fund. This, it was contended gave rise to a stronger argument for a grant of a security for costs.

56. The first defendant also sought to distinguish the judgment of Bergin J in Walter Constructions at [36]. It was contended that it is apparent from Bergin J’s judgment that there was an absence of evidence before the Court (in contrast to this case) regarding the financial position of the plaintiff and a recalcitrance of unit holders to pay special levies. The first defendant also submitted that there was a more significant levy amount in this matter.

57. The second defendant submitted that the decision of Brereton J is consistent with authorities regarding trust funds and the authorities of Street v Luna Park [2006] NSWSC 1317 and Felan’s Fisheries at [21]-[24]. It was submitted that the practicalities of obtaining funds from the owners would result in delay and that such a situation should not be borne by the defendants where it has been successful and a costs order has been made.

58. Contrastingly, the plaintiff submitted that the approach by Bergin J in Walter Constructions (which was followed by Einstein J in Austruc Constructions) should be applied in this matter. Referring to Walter Constructions, the plaintiff submitted that, in the absence of the defendant adducing evidence of recalcitrance on the part of the unit holders to pay levies or an inability of unit holders to pay a levied amount, the application for costs must be dismissed: Walter Constructions at [36], [38].

59. The plaintiff submitted that Brereton J in Eastmark had not disagreed with the judgment of Bergin J in Walter Constructions. Brereton J had distinguished the facts of that case from the circumstances underpinning Bergin J’s judgment on the basis that the evidence as to the impecuniosity of the plaintiff in the two cases differed: Eastmark at [7]. The plaintiff submitted that his Honour in Eastmark at [6] had held that, unless the plaintiff cooperated or was wound up, the defendants could not enforce the imposition of a special levy on the unit holders. The plaintiff submitted that such a conclusion was at odds with the statutory requirements in the Act vis-à-vis owners corporation, which compelled an owners corporation to impose a levy for expenses that cannot otherwise be met.

Austruc Constructions

60. The plaintiff submitted that factual circumstances underpinning the judgment of Einstein J in Austruc Constructions was analogous to the current matter because his Honour at [17], found that there was evidence of payment of the levies within a matter of weeks, no evidence of unwillingness to pay levies and further the levies imposed were for the purposes of the litigation per se.

61. The second defendant contended that Einstein J’s statement of principles in Austruc Constructions did not add “precedential value” to Bergin J’s judgment. Moreover, the judgment in Walter Constructions was premised upon the prospect of the imposition of a levy which was much smaller than would be required in the present matter. The second defendant further submitted that Brereton J’s judgment can be distinguished from Bergin J’s judgment.

Discretionary Factors

Prospects of success and genuineness of the proceedings – rr 42.21(1A)(a) and (b)

62. With respect to the prospects of success and the genuineness of the proceedings (rr 42.21(1A)(a) and (b)), the parties advanced competing submissions.

63. The first defendant conceded that the plaintiff’s claim was reasonably arguable. However, the second defendant submitted that it did not accept that the plaintiff’s prospects of success were strong and contended that the Court should not engage in an assessment of the plaintiff’s case as it would be neither appropriate nor relevant to do so.

64. The plaintiff submitted that it had a strong case. The plaintiff relied upon the following contentions. First, that the second defendant instructed the first defendant that the limitation time was not applicable. This occurred on 21 September 2009, prior to the expiration of the limitation period. Second, written advice by the second defendant, with respect to limitation issues, was only provided after the expiration of the limitation period. Further, the statement of claim brought against the first and second defendant, in the substantive proceedings, followed the ruling of Stephenson J in the Vero proceedings that the plaintiff’s claim against Vero was statute barred.

Impecuniosity of the plaintiff – r 42.21(1A)(c)

65. The first defendant led evidence indicating that creditors had not been paid by the dates in which the plaintiff’s invoices were due and payable. It was submitted that the failure to pay debts upon becoming due and payable was an indicator of insolvency. This was supported with reference to the definition of “solvency and insolvency” under s 95A of the Corporations Act:

(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent.

66. Further, the affidavit of Mr Lalji deposed that the net asset position of the plaintiff was negative $422,985.12. This amount included monies owed by way of levies receivable at a sum of $68,537.46. The first defendant contended, that on the basis of the established net asset position, the plaintiff would require the imposition of a special levy to meet its own solicitor’s costs short fall. This reliance upon special levies to pay future costs was said to be indicative of impecuniosity. In the same light, the first defendant supported its submission with reference to the plaintiff’s lack of cash reserves and that fact it was not a registered proprietor of land (i.e. owned no real property).

67. The second defendant referred to the statutory duty of the plaintiff to “maintain and repair property”, pursuant to s 106 of the Act, and submitted that this should be factored into an assessment of impecuniosity. It was contended that the obligation imposed a costs burden, with respect to the rectification of defects, and compliance had the potential to worsen the plaintiff’s financial situation. It was also noted, that there is an absence of any punitive measures if the event of non-compliance with the provision.

68. The plaintiff denied that it was impecunious. It submitted that a classification of “impecuniosity” required two findings:

1. no assets available to be called upon to meet an obligation, and

2. no other source of funds to meet obligations.

69. The plaintiff primarily relied upon the latter consideration. The plaintiff contended it has the capacity to pay the defendants’ costs of the proceedings with the imposition of a special levy. Accordingly, it submitted that the defendants’ reliance upon the plaintiff’s interim financial statements of 30 November 2016, for the purposes of establishing impecuniosity, was misplaced. The plaintiff accepted the negative status of its net asset position but described this factor as “largely uninstructive for the present purposes”.

Plaintiff’s impecuniosity is attributable to the defendant’s conduct – r 42.21(1A)(e)

70. With respect to whether the plaintiff’s impecuniosity was attributable to the defendant’s conduct, the plaintiff claimed that any adverse financial position was due to the defendant’s conduct (r 42.21(1A)(d)).

71. In the event that the plaintiff was found to have been unable to pay an adverse costs order, the plaintiff submitted that a very substantial part of the financial difficulties arose from legal fees paid to the first and second defendant in the Vero proceedings. Those costs would not have been incurred if either of the defendants had advised the plaintiff that its claim against Vero was statute barred. This was submitted to be a cause of that impecuniosity and should warrant the exercise of a discretion against an order for security for costs.

CONSIDERATION

The Threshold Question

72. Having regard to the aforementioned authorities, it is necessary to consider the threshold question.

73. The plaintiff is a body corporate constituted by the owners of the lots within Strata Plan 64415 (s 8(1) of the Act).

74. The plaintiff has principal responsibility for the strata scheme and, in particular, has, for the benefit of the owners or lots in the strata scheme, the management and control of the use of common property and administration of the strata scheme (s 9(1) and (2) of the Act). The plaintiff has responsibility for managing the finances of and keeping accounts for the strata scheme, as well as maintaining and repairing common property (s 9(3) of the Act).

75. The plaintiff was required to and did establish an administrative fund into which the plaintiff was required to pay the contributions levied on, and paid by, owners of lots (s 73(1) and (2) of the Act).

76. Section 73(4) of the Act provides that the plaintiff may only pay money from the administrative fund for, inter alia, the purpose of making payments of the kind for which estimates have been made under s 79(1) of the Act. Section 79(1) of the Act provides that, inter alia, at each annual general meeting held by the plaintiff, an estimate must be made as to how much money the plaintiff will need to credit towards the administrative fund for actual and expected expenditure for the maintenance in good condition on a day-to-day basis of the common property and to meet recurrent expenses.

77. Bergin J in Walter Constructions stated (at [30]) the administrative fund was generally used to meet recurrent expenses.

78. In the financial statement for the plaintiff, for the period 1 January to 16 November 2016, the balance shown in the administrative fund of the plaintiff was negative $403,761 (rounded to the nearest dollar). The administrative fund balance was made up of a carryover balance of negative $385,153 which included a mix of revenue by levies $43,500 and expenses, the largest of which was special levy expenses of $25,550. The administrative fund as of 20 February 2017 again had a negative balance of $399,193.

79. As earlier mentioned, the plaintiff was required under the 1996 Act to establish a sinking fund, which has as its counterpart the capital works fund under the Act (see s 74 of the Act).

80. Bergin J in Walter Constructions (at [12]) referred to sinking fund as generally being used to meet expenses of the capital nature, such as painting buildings and replacing fixtures or fittings. The amounts payable into the capital works fund include, inter alia, contributions levied on and paid by owners of lots and payments out of the fund are limited to four purposes, one of which relevantly is payments of a kind for which estimates have been made under s 79(2) of the Act, including generally matters of a character referred by Bergin J in her judgment.

81. In the financial statements for the period ending 20 February 2017 the capital works fund showed a negative balance of $23,793 (rounded to the nearest dollar). That sum is made up of a carryover balance of dollars $23,778 (rounded to the nearest dollar). The sum of the negative balances for the administrative and capital works (sinking) funds as 20 February 2017 was an aggregate negative net asset position for the plaintiff of $422,985 (rounded to the nearest dollar). Furthermore, the cash at bank totals an amount of $45,950 (nearest dollar). The cash reserves are grossly insufficient to meet any estimated costs in the proceedings and, in any event, form part of the balance sheet showing a negative net asset position.

82. The plaintiff owns no real property. The limit of its functions in dealing with property are to grant a license as to the use of the common property (see s 112(1) of the Act) and to maintain and repair the common property (see s 9(3)(c) of the Act).

83. By s 81(1) of the Act, the plaintiff must determine amounts to be levied as a contribution to the administration and the capital works fund to raise the amounts estimated as needing to be credited to those funds. The amount levied is determined at the same meeting at which the estimated amounts are determined (s 81(2) of the Act). Regular periodic contributions of this kind are taken to be duly levied on the owner of a lot, even though notice levying the contributions was not given to the owner (see s 83(4) of the Act).

84. If the plaintiff is subsequently faced with other expenses it cannot meet from either fund, s 81(4) of the Act provides “it must levy on each owner of a lot in the strata scheme a contribution to the administrative fund or capital works fund determined at a general meeting of the owners’ corporation, in order to meet the expenses”. The plaintiff correctly submitted, in my view, that this provision mandated that the plaintiff levy the owners in the circumstances described in s 81(4) of the Act. However, the legislation does not dictate, as I will later discuss, the terms of the levy imposed. Section 81(5) specifically contemplates that levies may be payable by instalment if the owners corporation so determines. The instalments must be regular but no time limitation is otherwise imposed. Further, the striking of levies requires the adoption of a particular process which is described below. Both sets of provisions have implications as to the time which will elapse before a liability such as a costs order will be paid.

85. The levy can be struck at a general meeting (s 81(4) of the Act). The requirements for the convening of a general meeting of the plaintiff are contained within ss 19, 22, 23, 24 and Sch 1 of the Act. Amongst those procedural requirements is a requirement to give seven days written notice of the calling of a general meeting to each lot owner (see Sch 1 cl 7(2)).

86. Once a determination is made by a general meeting, the plaintiff will then levy a contribution required to be paid to the administrative fund or capital works fund by each owner by the giving of written notice of the contributions payable (s 83(1) of the Act). However, there is no provision which provides for a fixed period of time in which the notice is to be issued after a general meeting. The extent of a time period limitation is merely that any contribution levied by the plaintiff becomes due and payable to the plaintiff on the date set out on the notice of contribution, which must be at least 30 days after the notice is given (s 83(3) of the Act).

87. The plaintiff relied upon the provisions of s 86 as confirmation of its ability to pay any costs order. This provision was not considered by Bergin J in Walter Constructions (or Einstein J in Austruc Constructions)

88. The effect of s 86(1) of the Act is that the plaintiff may make application to the NSW Civil and Administrative Tribunal for an order that the owner of a lot in a strata scheme pay a contribution that is payable by the owner if that contribution is not paid at the end of one month after it becomes due and payable. Section 86(2A) provides that the plaintiff may, without obtaining an order from the tribunal, recover as a debt in a Court of competent jurisdiction, a contribution not paid at the end of one month after it becomes due and payable together with interest (attention should also be drawn to the provisions of s 90(3) of the Act, which provides that the plaintiff must, for the purpose of paying the money order to be paid by it by a Court (including costs), levy contributions in accordance with the terms of any order).

89. Pausing at that juncture, a snap shot of the plaintiff’s financial position at the beginning of 2017 was a negative net asset position of about $422, 985. The creditors of the plaintiff are plainly accounted for in the financial accounts but it is useful to note that the total amount owed to creditors was $580 911, including monies owed to the first defendant for fees arising from the Vero proceedings of $309,527 (the second defendant is owed $262,524).

90. The second defendant contended that the Court should have regard to the cost of proceedings brought by the plaintiff, if unsuccessful, in assessing the plaintiff’s ability to pay for the purposes of r 42.21(1)(d). No submissions were received by the other parties to the contrary. I accept that this factor is relevant to the threshold question: Walter Constructions at [36]. That consideration will require an assessment of costs for the proceedings which I shall undertake at this juncture both with respect to the immediate question and the later question of the appropriate quantum for any security for costs order.

91. In his affidavit, Mr Cameron, who was a partner at Sparke Helmore Lawyers and solicitor for the first defendant gave evidence as to the estimated legal costs for the proceedings. Mr Cameron has a Bachelor of Arts and Bachelor of Laws degree from the University of Sydney. Before working at Sparke Helmore Lawyers, he spent nearly 10 years at Corrs. He has particular experience in class actions and advises directors and professionals on professional indemnity and insurance issues. He estimated costs of the proceedings to be $395,000 (including costs billed to date of $54,000). This estimate includes a provision for an eight day trial in the final hearing of the matter for which trial costs were estimated to be $119,080. It is noted that a lower estimate of $350,240 was provided in Exhibit “MJC1” annexed to his affidavit.

92. Mr Cameron estimated the range of costs recoverable following a party-party assessment to be within the range of $255,000 to $295,000 thereby giving an average of $275,000. With an acknowledgment that his client is not entitled to a complete indemnity for his anticipated costs the first defendant sought in the motion the amount of $270,000, or such other amount as the Court thinks appropriate.

93. Mr Jeffrey Connellan, who was a partner of Morey & Agnew Lawyers and solicitor for the second defendant, estimated a very similar amount of costs for these proceedings of about $392,168 (exclusive of GST) in his affidavit. Although this affidavit referred to an Exhibit GTC1, this exhibit was not filed in Court and no breakdown of the costs estimate was provided to this Court. Mr Connellan noted that there was a degree of uncertainty as to the precise number of witnesses, both expert and lay, required to support the second defendant’s defence. Mr Connellan estimated the recoverable amount of $275,000 for party-party costs (70% of estimated costs). The second defendant thus sought in the motion an amount of $275,000 or such other amount as the court deems appropriate.

94. The plaintiff’s evidence as to the costs of the proceedings comes, in part, through the evidence of Mr Kormas who is the senior brand manager of Sheldon and Hammond Pty Ltd and chairman of the executive committee for the plaintiff. He estimated the total costs for the proceedings to be $203,066 (rounded).

95. He based this estimate upon a six day hearing of the matter. In terms of party-party costs, Mr Kormas used a similar formula to that of Mr Cameron by providing a reduction to 70% of total costs thereby indicating that recoverable costs would be $142,146 (rounded).

96. The plaintiff also relied on the affidavit of Mr Whiffen, the solicitor for the plaintiff, who is described as the NSW commercial litigation and insolvency practice leader. Mr Whiffen provided his own assessment of the costs likely to be incurred based upon a review of the information and rates provided by the defendants. Mr Whiffen challenged the work that had been billed to date as well as the estimated costs for future legal work in the proceedings. He also gave an estimate of six days for the hearing as it was noted that there would be one lay witness and one expert witness for each of the three parties. Mr Whiffen estimated the cost of the first defendant to be $155,292 (rounded to the nearest dollar and inclusive of a reduction based upon party-party costs that is 70% of total costs).

97. Similarly, Mr Whiffen provided his own estimate as to the second defendant’s costs (for work already undertaken to date, interlocutory application and directions hearings, discovery and inspection, evidence and experts, mediation, further investigations, preparation for final hearing and a six day trial) to be $142,146 (rounded to the nearest dollar and inclusive of a reduction to 70% of costs on the basis of party-party cost estimate).

98. The first plaintiff submitted that, in estimating the costs of the proceedings, the retention of four experts by the defendant’s was unnecessary as there is no need for an expert to address the plaintiff’s claimed quantum. Further, it was contended the retention of an expert on building issues would not assist the court with respect to the claimed quantum.

99. In my view, on the limited evidence before the Court as to the proceedings, it would appear that the appropriate estimate for expert witnesses should be one per party. Given the nature of the issues in the proceedings, I consider an appropriate estimate for the length of the trial to be six days. A six day trial reduces the costs (on a party-party basis) for the first defendant, with no other adjustment to the estimate provided by Mr Cameron, to $202,500 (to the nearest dollar). I note that the costs estimate of the second defendant is marginally higher that the costs estimate that was provided by Mr Connellan.

100. Having regard to the breakdown of costs provided by Mr Cameron and Mr Whiffen (none being provided by Mr Connellan), the issues in the trial that are presently known to the Court (including the level of importance and complexity of the subject matter of the dispute) and a six day trial (rather than eight days), I consider an appropriate estimate of costs should be $180,000 for each defendant. (I have not reflected the small differentiation in the security for costs order sought by the defendants in the motions in this evaluation as there is insufficient material before the Court to make projections resulting in such fine calibrations).

101. The plaintiff gave no undertaking in relation to security for costs of the proceedings. Nor has the plaintiff raised a levy with respect to the estimated costs in advance of the proceedings. However, the plaintiff contended that:

1. The plaintiff is required by law to impose a levy to meet any costs order made by the Court if the plaintiff is unsuccessful in these proceedings.

2. The mechanisms within the Act provide for a process which would not lead to unreasonable delay in the defendants’ recovering their costs.

3. The plaintiff has historically shown a willingness and ability to pay levies.

4. There is no evidence of an inability to pay by the owners of the lots making up the strata scheme.

102. I will return to the first proposition in the context of considering the judgments of Walter Constructions, AustrucConstructions and Eastmark Holdings and my overall consideration of the threshold question. It is suffice to say that the statement provided an incomplete picture of the difficulties faced by the defendants in recovering monies ordered by the Court for costs.

103. The fourth proposition may be accepted if understood as referring to the financial asset position of each lot owner. Even though some of the lot owners owed monies to the plaintiff, there was no evidence as to their respective financial positions to that effect led by the defendants in the proceedings.

102. I turn then to the second and third contentions. The substantial area of debate in this respect was whether or not there was evidence of recalcitrance or as the first defendant submitted “levy fatigue”. A good deal of the debate in this respect focused upon whether the Owners’ Ledger demonstrated recalcitrance in paying levies.

103. The defendants drew upon examples of the owners corporation having to recover levies by means of debt notices, debt demands and debt recovery legal action notices. Particular attention was focused upon that part of the Owners’ Ledger which showed due dates, the amount for a levy and when that levy was paid.

104. It is true that that component of the Owners’ Ledger revealed a consistent pattern amongst the large majority of lot owners to pay levies only after such notices or actions were issued over a lengthy period of time. The pattern of such notices for each lot owner, from the period between 1 January 2011 and 13 December 2016, can be demonstrated by the further analysis from the Owners’ Ledger:

1. Lot 1 was issued with a debt recovery reminder notice in years 2013 and 2014. A debt recovery letter of demand was issued in 2013 and 2014 and a notice of debt recovery legal action was issued in 2014.

2. Lot 2 was issued with a debt recovery reminder notice three times in 2013 and once in 2014. A debt recovery letter of demand was issued in 2013 and 2014 and a notice of debt recovery legal action was issued in 2015.

3. Lot 5 was issued with a debt recovery reminder notice in 2013 and twice in 2014. A debt recovery letter of demand was issued in 2013 and 2014 and a notice of debt recovery legal action was issued in 2013.

4. Lot 6 was issued with a debt recovery reminder notice twice in 2014. A debt recovery letter of demand was issued in 2014 and a notice of debt recovery legal action was issued in 2014.

5. Lot 7 was issued with a debt recovery reminder notice in 2013 and a debt recovery letter of demand in 2014.

6. Lot 8 was issued with a debt recovery reminder notice in 2012, 2013 and 2014. A debt recovery letter of demand was issued in 2012 and early 2015. A notice of debt recovery legal action was also issued once in 2012.

7. Lot 9 was issued with a debt recovery reminder notice three times in 2012, two times in 2013 and once in 2014. A debt recovery letter of demand was issued twice in 2012 and once in 2013 and 2014. A notice of debt recovery legal action was also issued once in 2012 and once in early 2015. Furthermore $1,535 (rounded to nearest dollar) was still owing to the plaintiff.

8. Lot 10 was issued with a debt recovery notice in 2012, 2013 and four times in 2014. A debt recovery letter of demand was issued in 2012 and three times in 2014. A notice of debt recovery legal action was also issued three times in 2014.

9. Lot 11 was issued with a debt recovery notice in 2014.

10. Lot owner 12 was issued with a debt recovery notice in 2013 and there remains owing $1,388.97

11. Lot owner 13 was issued with a debt recover notice three times in 2013 and twice in 2014. A debt recovery letter of demand was issued in twice in 2013 and twice in 2014. A notice of debt recovery legal action was also issued once issued in 2013 and twice in 2014. Furthermore $71,035.86 is still owing, from this lot owner.

107. There are no delinquencies in relation to levies in the year 2011 and 2016. There was a more limited incidence of non-payment of levies in 2015, but, it should be noted that legal action notices were required with respect to lots 2 and 9. In total then, over the period 2013 to 2015, there was substantial evidence of debt recovery notices, letters of demand and legal action variously for all lots, save for lots 3 and 4.

108. According to the Owners’ Ledger dated 16 November 2016 there are three owners with debts to the plaintiff unpaid: lot 9 ($1,535), lot 12 ($1,889 (rounded)) and lot 13, the first defendant, ($71,036 (rounded)).

109. However, attention needs to be also given to receipts section of the Owners’ Ledger which was not addressed in the submissions of the parties. Those receipts would seem to show that, even though there is a regular delay in the payment of levies (by reference to the dates for receipt of levy payment and interests paid) the period of delay was not such, in and of itself, as would lead readily to a conclusion there was recalcitrance or an unwillingness to pay.

110. The Owners’ Ledger also illustrated another relevant pattern with respect to levies, namely, special levies were paid by instalment. Special levies fixed from time to time were paid in instalments which represented an amount less than the full instalment due in relation to particular items such as legal costs. There is no explanation in the evidence for this situation but it does accord with other evidence showing that significant liabilities remain unpaid. For example, the fees owed to the defendants from the Vero proceedings were still not fully paid as at February 2017. These fees relate to orders made by Stephenson J on 30 October 2014.

111. This puts into context one of the submissions by the plaintiff that it had demonstrated a capacity to pay by the means of special levies. The plaintiff pointed to the amounts paid to the first and second defendant in the Vero proceedings, in this respect, which amounted to the total sum of $983,191 (rounded). However, whilst that sum represents substantial repayment, it also represents a liability which has not been fully paid over an extended period of time (the amounts owing as set out earlier).

112. Similarly, when the plaintiff submitted in defence of the contention of its inability to pay, that it had paid by levy $1.8 million over 5 years, that contention needs to be understood in light of how the systems of levy and payment operate in practice. The counterpart is that the owners corporation has accumulated over a period of time a negative net asset position of $422,985.

113. This analysis provides the basis for two conclusions.

114. First, the evidence is supportive of the concern expressed by the defendants that mechanisms within the Act requiring levies to meet liabilities as a costs order do not warrant a conclusion that the payments will be made within a reasonable time. The opposite is the case.

115. Secondly, these assessments may also illustrate an unwillingness to pay, not merely because levies charged are unduly delayed in payment but because the levies charged are set, for financial or other reasons, in the form of instalments over a period of time.

116. There is then the question of rectification works. Section 106 of the Act requires that the owners corporation must maintain and keep in good state and serviceable repair the common property. The plaintiff must renew and replace fixtures and fittings comprised in the common property (s 106(2)).

117. The common property in the strata scheme is affected by the defects associated with the building project which the Vero proceedings concerned. On the evidence in these proceedings, these defects have not been rectified and monies necessary to undertake those tasks will not be covered by insurance as a result of the Vero proceedings. In other words, the plaintiff will be required to meet the costs of the rectification works. Those costs do not feature in the liabilities found within the financial accounts as at February 2017 and no provision has been made for the same (including the raising of levies).

118. There is in evidence before the Court quotations for the rectification works which range from $751,185 to $802,761. It may be noted that the first defendant’s submission refers to a quotation range between $802,761 and $826,303 by reference to an affidavit of Mr Lalji, which is not in evidence. The second defendant relied upon similar amount which was, again not referred to in evidence.

119. The plaintiff submitted that the cost of levies of building defects would be imposed over time, however, the manner in which it was to be imposed remains “up in the air” and thus should not be included in the assessment of the threshold question due to its indeterminate nature. Furthermore there was no evidence that the plaintiff would not comply with its obligations. I will refer momentarily to those issues.

120. I pause again to provide a further snapshot of the financial position of the plaintiff, this time in terms of owner obligations. The cost of meeting the present net negative asset position of the plaintiff for each lot owner (which will include lot 13) is $32,537 (rounded to the nearest dollar). Further, if it be assumed that no orders in the present proceedings would run against the first defendant as the owner of lot 13, then, when the aforementioned estimate of legal costs is added to the tally, the total levy required to be imposed on lot owners 1-12 would be an additional $30,000 for each lot owner. The total for each lot owner would thus be $62,537 (rounded to the nearest dollar)

121. I turn then to the three authorities which have been the subject of close attention by the parities in their submissions in these proceedings. In Walter Constructions, Bergin J considered an application by the defendant against an owners corporation, which was a body corporate under the predecessor legislation to the Act, namely, the 1996 Act and the Strata Scheme (Freehold Development) Act 1973 (NSW). The matter came to be considered under Pt 53 r 2 of the Supreme Court Rules which relevantly provided:

(1) Where, in any proceedings, it appears to the Court on the application of a defendant:

(a) that a plaintiff is ordinarily resident outside the State,

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

(c) subject to subrule (2), that the address of a plaintiff is not stated or is mis-stated in his originating process,

(d) that a plaintiff has changed his address after the commencement of the proceedings with a view to avoiding the consequences of the proceedings, or

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

the Court may order that plaintiff to give such security as the Court thinks fit for the costs of the defendant of and incidental to the proceedings and that the proceedings be stayed until the security is given.

122. Sub-rule 2(1)(e) was in very similar terms in the present rule under consideration save for a reference to a body corporate rather than a corporation. A considerable part of the judgment was devoted to considering whether there was a jurisdictional basis to bring the application under Pt 53 r 2(1)(b) and for that purpose her Honour considered various provisions of the then applicable legislation concerning strata schemes.

123. The only evidence before her Honour in relation to the question of an inability to pay was an exchange of correspondence between solicitors for the parties, which considered the costs of the proceedings and the capacity of levies to deal with any costs order. There was also a discussion (unresolved in the evidence) as to accumulated reserves and funds raised by a special levy. After noting that the evidentiary burden in the proceedings fell upon the defendant and that the inferences the defendant had sought the Court to draw in the proceedings were not available, her Honour made the following ruling (at [36]):

I am of the view that for the defendant to have discharged its burden, it needed to call evidence upon which, viewed objectively, I could be satisfied that the plaintiff was not entitled to raise a special levy to pay the costs or, if able to raise levies in respect of costs, that such levies would not be paid. There is no evidence of any recalcitrance on the part of the unit holders to pay the special levies nor is there any evidence of an inability in any of the unit holders to pay a levied amount of approximately $5,700 or $11,500 depending on whether the costs are $1 million or $2 million.

124. It might be noted that the relatively small levy which would need to be imposed upon unit holders was calculated on the basis that there were 174 unit holders in the strata scheme operated by the owners corporation. Her Honour also ruled (at [37]) that there were express restrictions on the owners’ corporation levying contributions to pay costs.

125. Nearly six years later, Einstein J in Austruc Constructions described the distillation of principles by Bergin J as unexceptional. His summary of the relevant principles was as follows (at [9]):

[9] In particular the plaintiff in resisting the present claim for security for costs has relied upon the following distillation of those principles which seems to me to be unexceptionable:

a) …

b) if the Owners Corporation is able to pay any adverse costs order by way of a special levy and there is no evidence of any recalcitrance on the part of any unit holder to pay the special levy, or inability for such payment to be made (and no evidence to the contrary) the defendant would not have discharged its evidentiary burden.

126. In considering whether the defendant had discharged this onus in persuading the Court that the plaintiff would be unable to pay the defendant’s costs, his Honour had regard to the fact that the owners corporation had raised special levies specifically to fund the litigation, the strata manager had received no express unwillingness to pay the levies and “all the lot owners have always paid levies within a matter of weeks of those levies being due and payable” (at [17]).

127. His Honour looked at the financial statements of the body corporate and noted the following: that the administrative fund totalled $58,031 and the sinking fund totalled $17,360. His Honour then stated that, given the amount of security sought by the defendants, a levy for such an amount would impose an impost on each unit owner of approximately $6,000.

128. About eight years later Brereton J delivered the third judgment under consideration namely, Eastmark Holdings.

129. It might be noted at the outset that the plaintiff contended that, because this judgment was delivered ex tempore, the reasoning in Walter Constructions and Austruc Constructions should be preferred. I do not accept this submission for two reasons. First, the judgment of Brereton J is a closely reasoned judgment based on authority including the judgments in Walter Constructions and Austruc Constructions. Secondly, and perhaps more importantly, the reasoning in his Honour’s judgment was the product of his Honour’s deliberations in earlier judgments, albeit in relation to security for costs applications brought against a corporate trustee: Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 at [9] and Funds First Pty Ltd v Owners Corporation Strata Plan 66609 [2008] NSWSC 428 at [5]. Both cases were considered under, inter alia, r 42.21(1)(d) of the UCPR. Further, this reasoning had a substantial pedigree: Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40-584 (“Laundry Coin-Wash”) which was followed by Tadgell J (with whom Cummins J agreed) in Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) (Limited) (1995) 1 VR 150 at 154-155.

130. The judgment in Eastmark Holdings concerned an application for security for costs against a plaintiff which was an owners corporation. Brereton J commenced his judgment by noting that, although the plaintiff had liquid assets, its liabilities exceeded its assets by a very substantial margin and “absence a right of recourse to others that would provide” a reason to believe that there is chance that, in events which can be fairly described as reasonably possible, the plaintiff corporation will be unable to pay the cost of the defendants (relying on passage from Beach Petroleum NL v Johnson at 205). In conformity with the issues raised in these proceedings his Honour then identified (at [2]) that the real question raised in the proceedings before him “was the significance of the circumstances that… the plaintiff would have a duty to strike a further levy on each owner to contribute to the administrative fund, an amount to be determined by a general meeting to cover the additional liability”.

131. His Honour then turned to consider the authority in Laundry Coin-Wash and the judgment of French J (as he then was) in Pitcairn Investments Pty Ltd and John Edward Local v Burwick March Pty Ltd and Anthony Stanley Marwick [1993] FCA 327 (at [9]) in order to state the principles applicable for determination of applications for security for costs against a corporate trustee. His Honour observed that those authorities stood for the principle that the ability of a plaintiff to have recourse by way of indemnity to a trust fund or similar is not an answer to an application for security in this type of situation.

132. His Honour then opined that the principles applicable in relation to security for costs applications with respect to trustees were applicable in the case before him. His Honour did so by analogous reasoning which appears in [6] of his judgment as follows:

The same applies in this case: it seems to me that, unless the plaintiff itself cooperates or unless it were wound up, the defendants could not enforce any right and duty of the plaintiff to raise an additional levy from the unit holders. The defendants would have no direct process of execution against the unit holders for the purposes of doing so. The extent to which the levy would be productive in any event would depend upon the terms of the resolution determined at a general meeting of the Owners Corporation by the people liable to pay and it cannot be excluded that they, or some of them, might have some defence to a levy being struck.

[Emphasis added.]

133. Immediately after those observations, Brereton J turned to the judgment in Walter Constructions. His Honour identified the test applied by her Honour as being in similar terms to that described by Einstein J in Austruc Constructions. His Honour then distinguished the circumstances of that matter from the matter before him stating that Walter Construction was “a rather different case from the present”. His Honour considered the point of distinction, was the level of “impecuniosity” of the plaintiff in the two matters. Brereton J then made the following observation at [7]:

It is true that, in the case of Owners-Strata Plan No 50530 v Walter Construction Group Ltd [2001] NSWSC 820, Bergin J (as her Honour the Chief Judge in Equity then was) said (at [36]) that for the defendant to have discharged its burden, it needed to call evidence upon which, viewed objectively, the Court could be satisfied that the plaintiff was not entitled to raise a special levy to pay the costs or, if able to do so, that such levies would not be paid, and in the absence of evidence of recalcitrance on the part of the unit holders to pay the special levies, was not so satisfied. However, that was a rather different case from the present. In particular, as I understand it, there does not appear to have been evidence of the impecuniosity of the plaintiff itself in the way in which there is in this case. Her Honour does not appear to have been referred to the line of authority descending from Laundry Coin-Wash and Pitcairn Investments.

134. It follows that primarily Brereton J distinguished Walter Construction upon the basis of the factual circumstances applying in each matter, namely the impecuniosity of the plaintiff. It is reasonably clear that his Honour did not demur from the approach adopted by Bergin J in circumstances where there was an absence of evidence of impecuniosity. However, his Honour considered that, in a case where the plaintiff’s liabilities exceeded its assets by a very substantial margin with modest liquid assets, the application of the principles in Laundry Coin-Wash should be applied to the determination of the application for security for costs.

135. The question posed by the parties in these proceedings is in essence, whether the development of principles by way of analogy from the law of trusts by Brereton J in Eastmark Holdings holds good in the light of the statutory regime governing strata schemes in the circumstance of the matter.

134. Before turning to that analysis it is useful to consider the judgment in Laundry Coin-Wash which was the foundation to Brereton J’s approach in Eastmark Holdings but received little attention by the parties in these proceedings.

135. Laundry Coin-Wash was a judgment delivered by Smithers J on 29 June 1985. The principal proceedings concerned a statement of claim in which the applicant sought relief with respect to alleged misleading or deceptive conduct by the respondents in contravention of the provisions of s 52 of the Trade Practice Act 1974 (Cth). The respondent sought an order that the applicant give security for costs with respect to the proceedings pursuant to s 56(1) of the Federal Court Act 1976 (Cth), order 28 r 3(1) of the Federal Court Rules 1979 (Cth) and s 533 of the Companies (Vic) Code as made applicable by s 79 of the Judiciary Act 1903 (Cth). Both order 28 r 3(1) and s 533 established gateway conditions for the determination of the application in very similar terms to s 42.21(1)(d).

136. The applicant in the primary proceedings was a trustee of a unit trust established pursuant to a deed of trust. The trustee provided that the trustee would be entitled to be indemnified out of the assets for the time being comprising of the trust fund against liabilities incurred by the trustee in the exercise of any of the powers in discretions invested in the trust.

137. The applicant had an asset in the form of a half ownership in a business as well as the right of indemnity. However, Smithers J found (at [6]), as a matter of substance, so far as the applicant had any entitlement to tangible assets, it was an entitlement only as trustee, the beneficial owner thereby being the trust. In consequence, his Honour found that “any attempt to execute against those assets and to realise the right title and interest of the applicant company therein would be an unproductive exercise” (at 6).

138. Smithers J then turned to the question of the indemnity. The first paragraph is extracted in paragraph [3] of Brereton J’s judgment in Eastmark Holdings and is in the following terms:

With respect to the indemnity, unless the applicant itself co-operated, or the applicant company were wound up, benefit could not be obtained by the respondents thereunder. No direct process of execution would be available for the purpose of obtaining that benefit. Further, the extent to which the indemnity would in any even to be productive would depend on the state of the finances of the trust. And the possibility of some defence cannot be ignored.

141. Without deflecting from the importance of the aforementioned extract, there is a further passage from judgment of Smithers J which requires some attention. In the immediately preceding paragraph in the judgment Smithers J stated as follows:

Where the only tangible assets of an applicant company are held in trust for another entity and its solvency depends on its right as trustee to indemnity against that entity it is necessary for the Court to have in mind the difficulties which a successful respondent would face in attempting to execute in respect of an order for costs. Indeed, unless some step is taken to alleviate those difficulties it is reasonable just to treat the applicant company as if it were without assets to meet such a liability.

142. As mentioned, Laundry Coin-Wash was followed by French J in Pitcairn Investments. The first applicant in that matter was a trustee, in that case for the “local family trust”. French J found that it was not sufficient for the first applicant to point to a right of indemnity out of the trust assets as an answer to the application for a security for costs in the matter and that “a successful respondent ought not to have to resort to the enforcement of the derivative rights to recover its costs” (at [9]). His Honour noted that the applicant had “a very modest net asset position” and that the asset position can be diminished at will by the first applicant (at [9]).

143. It must be steadily born in mind that the resolution of the threshold question depends upon a determination as to whether the defendant has established the existence of a relevant inability, to adopt an expression used by Black J in Felan’s Fisheries, to the requisite degree upon the facts and circumstances of a particular matter.

144. I do not consider that the circumstances of this matter may be distinguished from those in Eastmark Holdings. It follows that, as Brereton J did in that matter, the circumstances in this matter may be distinguished from Walter Constructions, although, as will be observed below, I consider that some of the principles stated by Bergin J in Walter Constructions may also be applied to in the present circumstances.

145. The plaintiff’s accounts reveal a current substantial net negative asset position. The plaintiff has no assets and there are small cash reserves relative to the defendants’ liabilities and the costs order estimated for the proceedings. It may be observed that Bergin J in Walter Constructions referred to evidence of an inability to pay by unit holders within a particular context, namely, that the unit holders in that matter would be levied at an amount about $6,000 or $12,000 depending upon the estimate of costs. Similarly, in Austruc Constructions, the impost for each unit holder by a levy arising from a costs order was about $6,000.

146. In this matter the total levy required to be imposed on lot owners 1-12 vis-à-vis the estimated costs order would be about $30,000 for each lot owner. Further, in this matter, there is the additional burden for each unit holder of discharging the negative net asset position. As earlier mentioned, when that consideration is factored in, for the purposes of considering the requisite inability to pay, the current burden upon unit holders in lots 1-12 rises to a levy of about $62,537 for each unit holder.

147. Smithers J in Laundry Coin-Wash referred to the difficulties a successful respondent would face in attempting to execute an order for costs (in the case of a trustee corporate plaintiff) and that, unless some steps were taken to alleviate those difficulties it was reasonable to treat the applicant company as, notwithstanding an indemnity being available, as “if it were without assets to meet such a liability”.

148. By analogy, Brereton J drew upon the circumstances under which a plaintiff owners corporation operates in law to find, with respect, correctly in my view, first that the defendant in that matter would have no direct process of execution against unit holders (what French J described as a confinement to a “derivative right”) and, secondly, the extent to which a levy would be productive, in any event, would depend upon the terms of a resolution carried at a general meeting of the plaintiff by the people who were liable to pay.

149. The plaintiff submitted that, in essence, his Honour was incorrect in that opinion because the Act required the plaintiff to raise levies to meet costs (the first mentioned proposition referred to in [101] above). I do not agree.

150. Whilst it is true that the plaintiff has a legal obligation to levy the lot holders in the strata scheme to meet an order for costs (or other liabilities) that legal impost does not diminish the difficulties that would be encountered by the defendants in recovering monies owed under a costs order as discussed by Brereton J, because:

1. the obligation to raise levies does not diminish the difficulties faced by a defendant in acting upon derivative rights;

2. some lot owners may have a defence to a levy being struck;

3. the mechanisms for the recovery against the relevant lot owners contributions are limited and ultimately dependent upon recourse by the plaintiff to recovery actions including legal actions (see s 83 of the Act). These processes are exclusive of the defendants, involve substantial sum of money in this case, and may involve a significant time period; and

4. there is no statutory requirement that a general meeting convened to establish levies in accordance with the obligations must resolve to pay the defendants a full instalment on one occasion as opposed to staged or periodic instalments (s 81(5) of the Act).

151. The last two observations squarely raise the question of whether costs ordered would be paid within a reasonable time.

152. Brereton J did not consider the issue of whether, in assessing the requisite inability, the owners corporation in that matter would meet any costs order, by levy, within a reasonable time as such. This consideration is implicit, however, in his discussion of the difficulties defendants would face with recovering costs. It is also implicit in the discussion of principle in Walter Constructions where her Honour dealt with the question of recalcitrance.

153. The plaintiff may determine that special levies are fixed by instalment in order to meet an adverse costs order (s 81(5) of the Act). The evidence in these proceedings demonstrated that the historical pattern of meeting liabilities including costs orders was by means of special levies paid by instalment. On the pattern disclosed in the Owners Ledger as earlier discussed, I consider there is a proper basis to conclude that any costs order in the proceedings will not be met within a reasonable time because of the likelihood of the continuance of this pattern given the plaintiff’s financial position. This is a relevant factor in determining the threshold question.

154. The likelihood of an unreasonable time to pay an order for costs is increased by the financial pressures faced by the plaintiff arising from its net negative asset position and the estimated costs of the proceedings. I do not consider, in this respect, the issue of rectification costs may be completely ignored as sought by the plaintiff. The rectification works must be undertaken in accordance with s 106 of the Act, have been outstanding over a substantial period of time and quotations have been received for the work. Whilst I accept that it is not a current imposition upon the plaintiff, as such, it may be relevant to the question of whether the plaintiff will meet a costs order by levy within a reasonable time, noting that the proceedings themselves will take some time to conclude. (It will be recalled, in that respect, the opinion as to the requisite inability must be formed at the time of judgment). However, I consider the issue of rectification costs primarily relates to the issue of impecuniosity.

155. I consider that the threshold question must be answered in favour of the defendants. I find, for the purposes of r 42.2(1)(d), the defendants have established, on the evidence before the Court, there is a reason to believe that the plaintiff will be unable to pay the costs of the defendant if so ordered.

156. Without limiting the aforementioned discussion, the following factors, by summary, principally feature in that conclusion:

1. The substantial negative net asset position of the plaintiff;

2. The cash reserves of the plaintiff are meagre when compared with the estimate of the quantum of an adverse costs order in this matter and insufficient to meet that obligation;

3. As a corollary of (1) and (2) each lot owner would face a substantial levy to meet the estimated cost order alone, in addition to the levies designed to deal with the current negative net asset position;

4. The plaintiff has no real property;

5. There has been no undertaking given by the lot owners to pay any levies when it was imposed upon them and to do so within a reasonable time frame;

6. The executive committee has not determined to raise a special levy to meet any expected costs order (of the kind mentioned by Einstein J in Austruc Constructions);

7. The aforementioned discussion of the applicability of Brereton J’s judgment in Eastmark Holdings (see [150] of this judgment); and

8. The conclusions reached (in the light of the preceding analysis) in [114] and [115] of this judgement.

157. This determination is not conclusive of the application for security for costs, as such, it is now necessary to consider the discretionary factors arising under r 42.21(1A) and other relevant discretionary factors.

Discretionary Factors r 42.21(1A)

158. I turn firstly to the question of impecuniosity.

159. It is clear from the language of r 42.21 that a finding of the requisite inability under r 42.21(1)(d) is not to be equated with a finding as to impecuniosity for the purposes of r 42.21(1A)(c). On the other hand, the factual circumstances giving rise to an affirmative answer to the threshold question are relevant to the determination of whether there is impecuniosity under r 42.21(1A)(c).

160. Bearing those principles in mind, I consider that a finding should be made that the plaintiff is impecunious for the following reasons:

1. The liabilities of the plaintiff are $542,621 as at 20 February 2017. As demonstrated by the plaintiff’s negative net asset position, this sum far exceeded the asset position of the plaintiff: see Treloar Construction Pty Ltd v McMillan [2016] NSWCA 302 at [44] (per Beazley ACJ). There are significative negative balances in both the administrative and capital works funds. There is no evidence to suggest that a similar position would not be maintained as at the date of judgment.

2. The plaintiff holds no real property and has limited cash reserves.

3. In substance, there are grossly insufficient assets to meet the expected costs of these proceedings (the quantum of costs assessed by the Court for the motions is $360,000) whether assessed in isolation or together with the negative net asset position of the plaintiff. There are no provisions to meet such obligations other than the potential to raise levies.

4. The first defendant submitted, correctly in my view, that creditors had not been paid by date in which the plaintiff’s invoices were due or payable. The plaintiff had nearly $30,000 worth of outstanding invoices to multiple creditors as at 16 November 2016. Although that amount has been reduced to $10,000 under the current accounts (20 February 2017), there remains outstanding a substantial amount of legal costs over a lengthy period of time. Further, there was evidence, as earlier described, of a failure to pay levies when due and payable in the years 2012 to 2015. It is true that period excluded the most recent year, 2016, but the period in question coincided with the existence of an outstanding legal cost burden; the counterpart of which is any adverse costs order made in these proceedings.

5. By the operation of s 106 of the Act, the plaintiff’s financial standing must also be measured in terms of the rectification costs because, even though the costs do not presently stand as liabilities in the financial accounts of the plaintiff, they are required to be met by law. In short, they represent a future liability for which no provision has been made by the plaintiff of a substantial amount which may materialise by the judgment in the matter but in any event reflect upon the financial standing of the plaintiff.

6. In those circumstances, I consider the approach adopted by Brereton J in Eastmark Holdings and Smithers J with respect to a corporate trustee in Laundry Coin-Wash may be adopted in this case, namely, notwithstanding that the plaintiff may raise levies in accordance with the Act, in the absence of some step taken by the plaintiff to alleviate the difficulties facing the defendants to recover costs, the plaintiff should be found to be or taken as if it were without sufficient assets to meet the liability occasioned by the cost order. In any event, the state of present and projected indebtedness of the plaintiff and the plaintiff’s inability to make payments when due and payable (or the corollary that they will not pay a costs order within a reasonable time) is a plain indication of impecuniosity.

161. Before coming to particular discretionary factors relied upon by the plaintiff, I note two discretionary factors in favour or supportive of an order for security for costs.

162. First, the magnitude of the risk that the plaintiff will be unable to satisfy a costs order within a reasonable timeframe in the event that it fails in the proceeding. I consider this must be treated as being reasonably high, in light of my findings in relation to the threshold question. Further, it is of some note that a large amount of money is likely to be at risk in the event of an adverse costs order.

163. Secondly, no submission was put to the effect that these proceedings would be stultified by an order for security for costs or that the matter involved a matter of public importance. These factors arise for consideration under: r 42.21(1A)(f) and (g).

164. The plaintiff contended that an order for security for costs should not be made because they have strong prospects for success in the proceedings.

165. Where a claim prima facie discloses a cause of action then, in the absence of evidence to the contrary, the Court should proceed on the basis that the claim is bona fide and has reasonable prospects of success: see r 42.21(1A)(a) and (b) and KP Cable Investments at 197.

166. Here there was no contest by the first defendant that there is a reasonably arguable case. The second defendant contended that, beyond determining whether or not there is a bona fide claim, the Court should not proceed to engage in a “mini trial.” Those concessions, together with my assessment of the pleadings in the plaintiff’s statement of claim, readily permit a conclusion that a cause of action is disclosed. There is no evidence which would deny the claim as being bona fide. This question then is whether it may be concluded the plaintiff has a strong cause of action rather than reasonable prospects of success.

167. I have earlier discussed the pleadings of the parties in these proceedings. There is insufficient evidence before the Court to enable any conclusion to be reached as to whether the defendants were retained by the plaintiff to advise on the Vero claim prior to 21 January 2010, when the claim became time barred under the Limitation Act. The pleadings of the first defendant give rise to real factual issues in this respect including when instructions were provided to counsel to settle a statement of claim.

168. However, the reliance by the first defendant upon an advice or opinion by counsel as having been received prior to the expiry date does add a dimension to this consideration which is favourable to the plaintiff although it must be noted that no amended defence has been filed by the second defendant. The plaintiff may also have some prospects in relation to their fiduciary duty pleadings.

169. All of that said, on the limited evidence before the Court, I do not consider a determination may be made that the defendant has strong prospects for success. The better view, in conformity with the relevant authority, is that a finding be made that the plaintiff has a reasonably arguable case and that the viability of its action is elevated, at least against the second defendant, by the pleadings of the first defendant (unsupported by evidence). This is a discretionary factor in favour of the plaintiff, but limited in its significance in the light of the lack of evidence as to the relevant issues and the incomplete development of pleadings in the proceedings.

170. In reliance upon r 42.21(1A)(d), the plaintiff contended that its impecuniosity was due to the defendant’s conduct.

171. The provisions of r 42.21(1A)(d) brings with it, as the plaintiff accepted, a notion of causation. The sole basis for the contention was that the legal costs of the defendant in the Vero proceedings had resulted in its impecuniosity.

172. There are two difficulties with this contention. First, this submission contains a significant element of circularity. The submission must be found to be premised upon the basis that the legal costs arose because of negligent advice with respect to the Vero proceedings. In the absence of a submission that the costs charged were themselves unlawful or inappropriate (and none is alleged), that contention (as to attribution or cause) must ultimately depend upon the determination of the very question posed by these proceedings, namely, whether the defendants were negligent (in breach of various duties). That issue is wholly contested and as yet undetermined.

161. In any event, it is difficult to envisage how it might be relevantly said that the defendants caused the impecuniosity of the plaintiff, in the sense of fault or wrong, if they had merely legitimately raised fees for work done.

162. Secondly, the plaintiff had not addressed evidence as to its financial standing prior to the imposition of the legal costs, so as to demonstrate that impecuniosity comes wholly or substantially from the payment of costs in the Vero proceedings.

163. It is considerations of this kind which have led to considerable caution being adopted in taking into account a defendant’s contentious contribution as a discretionary factor in determining security for costs applications unless there is a material risk that the requirement for security will stifle the plaintiff of an apparently genuinely arguable claim, a finding not sought in these proceedings: see Statewide Developments Realty Pty Ltd v The Owners Corporation, SP 77457 [2013] NSWSC 1750 at [18] (as per White J) and Nonox Australia v Certain Underwriters at Lloyds Subscribing to Contract No CV0263CGL [2014] NSWSC 221 at [49] (as per McDougall J).

164. In all the circumstances, and upon the balancing of the aforementioned discretionary factors, I consider that it is appropriate, in the exercise of my discretion, to make an order for security for costs in favour of the defendants, and thereby grant the motions, subject to the issue of quantum.

Quantum

177. Turning to quantum, the first defendant seeks an order that security be provided in the sum of $270,000 or such amount as the Court may consider appropriate.

178. The second defendant seeks orders that the plaintiff provide security for costs in the amount of $275,000 or such amount as the Court may consider appropriate.

179. The plaintiff submitted that the quantum of security sought by each defendant was excessive and that any security for costs order should be $155,291.50 for the first defendant and $142,146.05 for the second defendant.

180. I propose to utilise the analysis employed earlier in this judgment to assess the appropriate quantum of security for costs and thereby consider the quantum of security for costs shall be $180,000 for each defendant.

181. On 16 June 2017, the Court announced the following conclusions, order and proposed orders:

CONCLUSIONS, ORDER AND DIRECTIONS MADE ON 16 JUNE 2017

182. The conclusions reached together with the order, proposed orders and directions (save for minor adjustments made with respect to the directions in (3) and (4) below) made by the Court on 16 June 2017 were as follows:

1. Having regard to my findings as to the threshold question and the assessment of discretionary factors, I make an order that the plaintiff provide security for the first and second defendants’ costs in the sum of $180,000. I also propose to make orders for the stay of the proceedings until the security is provided by the plaintiff and, further, orders under s 90 of the Act of the kind proposed by the first defendant in the amended notice of motion (noting that the first defendant proposed alternative orders in that respect).

2. Upon this ruling the defendants should, in the ordinary course, have a favourable costs order for the motions. However, I will reserve to the parties an opportunity to make submissions in relation to that question in the directions below.

3. The defendants shall bring in short minutes of order by 23 June 2017 in conformity with this judgment. The orders should be accompanied by a note identifying whether there exists any dispute as to the proposed orders.

4. In the event of there being no dispute as to the proposed orders, and subject to the satisfaction of the Court as to the terms of the same, the Court will make the orders administratively in Chambers. In the event of a dispute as to the form of the orders, the Court shall make directions for the disposition of that dispute.

5. As to costs, the defendants shall file and serve by 30 June 2017 any application for costs of the motions together with a short written submission in support of the same. The plaintiff shall file and serve any submission in reply within 14 days after the service of the defendants’ submissions as to costs. The Court will take further steps or make further directions subject to the terms of those submissions.

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Amendments

04 October 2017 - Formatting of paragraph [1] amended.

20 June 2017 - "Marc Jacobs QC" listed as the second defendant on the coversheet and in paragraph [1] changed to "Marcus Jacobs QC"

Decision last updated: 04 October 2017