Webuildem Pty Ltd (Receivers and Managers Appointed) v Arab Bank Australia Ltd
[2014] NSWSC 1058
•06 August 2014
Supreme Court
New South Wales
Medium Neutral Citation: Webuildem Pty Ltd (Receivers & Managers Appointed) v Arab Bank Australia Ltd [2014] NSWSC 1058 Hearing dates: 25 July 2014 Decision date: 06 August 2014 Jurisdiction: Equity Division - Commercial List Before: Stevenson J Decision: Application dismissed with costs
Catchwords: PRACTICE AND PROCEDURE - costs - security for costs - common ground respondent could not meet adverse costs order - burden of proof and evidentiary onus - discretionary factors - whether claim is made bona fide and arguable - whether there is delay in applying for security - whether respondent's impecuniosity attributable to the applicant's conduct - whether order would stultify proceedings Legislation Cited: Competition and Consumer Act 2010 (Cth) Cases Cited: Ballard v Brookfield Australia Investments Ltd [2013] NSWCA 82
Bell Wholesale Co Pty Ltd v Gates Export Corp (No. 2) (1984) 2 FCR 1; FCA 34
Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301; NSWCA 65
Epping Plaza Fresh Fruit & Vegetables v Bevendale Pty Ltd [1999] 2 VR 191
Golden Mile Property Investments Pty Ltd (in liquidation) v Cudgegong Australia Pty Ltd [2014] NSWCA 224
Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148
In the Matter of Webuildem Pty Limited [2012] NSWSC 708
Jazabas Pty Ltd Haddad (2007) 65 ACSR 276; NSWCA 291
Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; VSCA 93
Phoenician Holdings Pty Ltd t/as Cadmus Lawyers v Rahme [2012] NSWSC 1604
Prynew Pty Ltd v Nemeth [2010] NSWCA 94
Webuildem Pty Ltd v Arab Bank Australia Ltd [2012] NSWCA 242
Webuildem Pty Limited v Arab Bank Australia Limited (2013) 300 ALR 99; FCA 37
Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542Category: Interlocutory applications Parties: Webuildem Pty Ltd (Receivers & Managers Appointed) (Plaintiff/Respondent)
Arab Bank Australia Ltd (First Defendant/Applicant)Representation: Counsel:
D R Pritchard SC (Plaintiff/Respondent)
A Lo Surdo SC with B Koch (First Defendant/Applicant)
Solicitors:
Somerville Legal (Plaintiff/Respondent)
Henry Davis York (First Defendant/Applicant)
File Number(s): SC 2013/135055
Judgment
Introduction
This is an application for security for costs.
The plaintiff, Webuildem Pty Ltd, commenced these proceedings against the defendant, Arab Bank Ltd, on 1 May 2013.
The proceedings have reached the stage where Webuildem and the Bank have exchanged evidence in chief, including expert evidence. The matter will be ready for allocation of a hearing date once any evidence in reply is served.
By notice of motion filed on 13 June 2013, the Bank sought security for costs in the sum of $158,000. On 9 August 2013 the Court made orders, by consent, that Webuildem provide security in the sum of $75,000 by 16 August 2013. Webuildem complied with that order. The order was expressed to be "without prejudice and without admission as to the [Bank's] entitlement to seek further security for costs in these proceedings".
On 11 April 2014 the Bank filed the notice of motion now before me, seeking further security in the sum of $230,000 for the Bank's further costs up to the commencement of hearing.
It is common ground that, as a matter of fact, Webuildem will not be able to meet an adverse order as to costs.
Thus the question before me is whether any discretionary ground has been shown that would disentitle the Bank to the security it seeks.
As the Bank has discharged its onus to show that there is reasonable grounds to suppose that Webuildem could not meet an adverse costs order, the evidentiary burden has shifted to Webuildem to establish a reason why security should not be granted: per Beazley P in Golden Mile Property Investments Pty Ltd (in liquidation) v Cudgegong Australia Pty Ltd [2014] NSWCA 224 at [22]. There are judicial statements to the effect that, in an application for security for costs, the burden of proof rests on those seeking security "from first to last" (for example, Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; VSCA 93 at [21]). Macfarlan JA in Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301; NSWCA 65 at [20], explained that there is no inconsistency between those observations and those of Beazley P:
"The expression 'evidential burden'...includes reference to the principle that in certain circumstances a party who does not bear the ultimate burden of proof may have to raise for consideration matters that favour it if it wishes them to be taken into account in the determination of the case. The evidential burden of raising a matter is thus distinct from the legal onus of proving entitlement to an order for security for costs which it is correct to describe as resting throughout on an applicant for such an order."
Decision
The conclusion to which I have come is that I should not order security in this case. For the reasons I explain below, the factor that I consider to weigh most heavily in the balance is that were I to order security, it seems likely that the proceedings will come to an end; that is the proceedings will be stultified.
This is one of those difficult cases where the Court is faced with the prospect of ordering security for costs, and thus bringing a case, the merits of which have not yet been decided, to a premature end, or of refusing to order security and thus exposing the defendant to the certainty that, if it is successful, any costs order made in its favour will be of no value.
Here, the scales are finely balanced but, for the reasons I explain below, my opinion is that security should not be ordered.
I have been greatly assisted by the clear and succinct submissions made by Mr Lo Surdo SC, who appeared with Mr Koch for the Bank, and by Mr Pritchard SC who appeared for Webuildem.
Much of what follows, particularly concerning the recitation of the background facts, is drawn, with gratitude, from those submissions.
Background
There are 101 issued shares in Webuildem. The only individual shareholder is Ms Martina Athitakis, who holds one share. The remaining 100 shares are held by Jewelsands Pty Ltd which holds those shares as trustee for the Naga Kanala Trust. The beneficiaries of that trust include Ms Athitakis, her husband Mr Maroun Rahme and their five children.
From 2008, the Bank provided facilities to Webuildem to purchase and develop a property at Mortlake. Those facilities, totalling $28 million were varied and extended on a number of occasions and were repayable in full by 14 August 2011.
Webuildem did not pay to the Bank the monies advanced pursuant to the facilities on or before 14 August 2011 and on 30 August 2011, the Bank appointed Paul Gerard Weston and David Gregory Young as joint and several receivers and managers (the "Receivers") over each of the properties with respect to which mortgages had been granted to the Bank (including the Mortlake property).
On 9 November 2011, the Receivers commenced proceedings against Webuildem.
Those proceedings were listed for hearing on 7 March 2012 and settled that day. On 8 March 2012, Hammerschlag J made orders giving effect to the settlement agreement ("the Agreement").
It was a term of the Agreement that if Webuildem's indebtedness to the Bank was not repaid on or before 12 June 2012, the Bank was entitled to do all things necessary to have orders (the "Escrow Orders") entered. The Escrow Orders provided that, inter alia:
(a) the Bank was entitled to possession of each of the properties securing Webuildem's indebtedness to the Bank (including the Mortlake property); and
(b) Webuildem was to pay the Bank the sum of $23,721,717.20 plus interest at a rate of $8,101.68 per day commencing 8 March 2012.
By Interlocutory Process filed on 12 June 2012, Webuildem sought to have the Agreement be set aside or, alternatively, stayed. The application to set aside the Agreement was not pursued.
The stay application was dismissed by Black J on 27 June 2012: In the Matter of Webuildem Pty Limited [2012] NSWSC 708.
An appeal for leave to appeal from the decision of Black J was dismissed on 11 July 2012: Webuildem Pty Limited v Arab Bank Australia [2012] NSWSC 242: per Allsop ACJ and Barrett JA .
The Escrow Orders were entered on 16 July 2012.
On 30 July 2012, Webuildem commenced proceedings in the Federal Court of Australia seeking:
(a) a declaration that certain paragraphs of the Agreement "may not be pleaded in bar to [Webuildem's] claim in these proceedings"; and
(b) loss and damage on a number of grounds pursuant to s 236 of the Competition and Consumer Act 2010 (Cth) - Schedule 2.
On 31 January 2013, Foster J summarily dismissed those proceedings: Webuildem Pty Limited v Arab Bank Australia Limited [2013] FCA 37.
On 13 May 2013, by consent, Nicholas J granted Webuildem leave to discontinue an application for leave to appeal against Foster J's decision.
Mr Pritchard pointed out that in the Federal Court Proceedings, Webuildem had not sought to set aside the Agreement or the Escrow Orders. Nonetheless, Mr Pritchard accepted that the Federal Court Proceedings were "wrong" and that Foster J's decision was "correct".
As a result of costs orders made in the proceedings to which I have referred, the Bank has the benefit of certificates of taxation totalling $126,597.03 (none of which have been repaid).
In these proceedings, Webuildem seeks to set aside the Agreement based on a number of "Debt Representations" which relate, primarily, to the basis on which the Bank would charge interest on the advances made by it to Webuildem. Webuildem also claims damages said to arise from the making of the "Debt Representations".
At some stage, the bank also commenced proceedings ("the Guarantee Proceedings") against a number of persons who executed guarantees in favour of the Bank in respect of Webuildem's indebtedness to the Bank.
Amongst those guarantor defendants are Ms Athitakis's father, Mr Rado Rebek and Mr Maroun Rahme's parents, Mr George Rahme and Mrs Nouha Rahme. Each of those persons seeks to defend the Guarantee Proceedings by, in effect, repeating and relying on the matters alleged by Webuildem in these proceedings. To that extent, those individuals may have an "interest" in these proceedings and might be seen "to stand to benefit" from Webuildem's successful prosecution of these proceedings. I return to this aspect below.
Discretionary factors - the strength and bona fides of the plaintiff's case
Mr Lo Surdo submitted that Webuildem's case was "inherently weak" and that "the likelihood of the Court granting any of the relief sought is low".
Mr Lo Surdo pointed out that the Agreement was entered into by consent, and at a time when Webuildem was represented by senior and junior counsel in proceedings in which the quantum of the debt owed to the Bank was "squarely an issue".
Mr Lo Surdo drew attention to the remark of Allsop ACJ in the Court of Appeal:
"To say that the applicant entered into a settlement of a dispute which included as an aspect of it how much was owed to the other side, on the basis of a misrepresentation by the statement by the other side as to how much was owed, has its own inherent difficulties." (Webuildem Pty Ltd v Arab Bank Australia Ltd [2012] NSWCA 242 at [31])
Mr Lo Surdo also submitted that, even if Webuildem could make out its case that the Debt Representations were misleading or deceptive, Webuildem would have to demonstrate that restitutio in integrum was substantially possible.
On the other hand Mr Pritchard submitted that it would not be necessary for Webuildem to render restitutio in integrum. Mr Pritchard argued that the only reason that Webuildem was seeking to set aside the 8 March 2012 consent orders is so that its claim of damages could go forward and that, in any such claim, Webuildem would have to give credit for the amount still owing (some $8.6 million) under the Bank's facilities.
On an application for security for costs, it is not generally appropriate to canvass the merits of the plaintiff's claim beyond determining whether the claim is made bona fide and is at least arguable: see Jazabas Pty Ltd Haddad [2007] NSWCA 291 at [18].
The Bank has not asserted that Webuildem's claim is frivolous or vexatious. It certainly asserts that Webuildem's case is weak. The Bank has not, however, sought summary judgment and did not assert before me that its lack of success in the proceedings summarised from [17] to [26] above precluded it from bringing these proceedings. Further, as Mr Pritchard points out, Webuildem "has comprehensively pleaded its case...and served extensive lay and expert evidence in support of its claims".
Webuildem's case may well have its "own inherent difficulties", as Allsop ACJ observed. However, it seems to me that on this application I should not seek to make any assessment of any such "difficulties" and should proceed upon the basis that Webuildem's case is at least arguable.
Timing of the Bank's application for security
I have mentioned that the Bank first sought security by notice of motion filed on 13 June 2013; some six weeks after Webuildem commenced the proceedings. That led to the consent orders of 9 August 2013 (see [4] above).
At the directions hearing in the proceedings on 6 December 2013, the Court ordered Webuildem to serve any expert evidence by 18 December 2013 and ordered that any further application for security for costs by the Bank be filed and served by 21 February 2014. The Court noted that the period from 6 December 2013 until any such motion for security for costs was heard would not be regarded as disentitling delay in respect of any order for security which might otherwise be made.
Webuildem did not serve its expert evidence by 18 December 2013. On 28 February 2014, the Court extended the time for Webuildem to serve its expert evidence to 21 March 2014. The Court extended the time for any application for security for costs to be filed and served to 11 April 2014 and again noted that the period from 28 February 2014 until such motion for security for costs was heard would not be regarded as disentitling delay in respect of any order for security that might otherwise be made.
Webuildem served its expert evidence together with further lay evidence on 21 March 2014. The Bank filed and served the subject notice of motion on 11 April 2014 in accordance with the directions made on 28 February 2014. On 30 May 2014 the Court made directions in relation to the notice of motion and again noted that the period from 30 May 2014 until such motion for security for costs was heard would not be regarded as disentitling delay in respect of any order for security that might otherwise be made.
Evidently the Bank wished to review the whole of Webuildem's evidence prior to making a further application for security. That is understandable, but it has had the result that this application for security is brought after Webuildem has incurred some $300,000 in costs of these proceedings, a large percentage of which has been incurred in the preparation of Webuildem's evidence.
The bulk, if not all of those costs have been advanced to Webuildem by Ms Athitakis's father, Mr Rado Rebek. Mr Rebek is a former director of Webuildem.
Mr Pritchard submitted that a factor weighing in the balance against ordering security is that Mr Rebek, who Mr Pritchard submitted was a third party, has advanced a considerable sum to Webuildem which would be lost if security is now ordered.
However, Mr Rebek must have known, or alternatively ought reasonably to have known, that he was advancing funds in the face of the Bank's foreshadowed application for security. Further, on the occasions to which I have referred, the Court has directed (on at least one occasion by consent) that the various periods of adjournment would not be regarded as disentitling delay.
In these circumstances, I regard this factor as being neutral.
Was Webuildem's impecuniosity attributable to the Bank's conduct?
Mr Pritchard submitted that a further reason why security should not be ordered was that, on Webuildem's case, the Bank's purported appointment of receivers and managers to the Mortlake property and the Bank's subsequent sale of those properties would not have occurred but for the misrepresentations now relied on in these proceedings, and that this conduct deprived Webuildem of its only assets of substance.
I do not see this factor as weighing heavily in the balance.
The misrepresentations on which Webuildem relies relate primarily to the interest rates charged by the Bank. There appears to be no dispute that Webuildem was obliged to pay the Bank, by no later than 14 August 2014, the principal amount advanced nor that it failed to do so.
Webuildem may be able to make out its claim against the Bank in these proceedings but I am not able to say, at this stage, that the matters of which Webuildem complains in these proceedings, and no other factors, have led to its present financial position.
Stultification of proceedings
The Bank accepts that Webuildem is not in a position to provide security. The Bank also accepts that neither the sole director and sole individual shareholder or Webuildem, Ms Athitakis, nor her husband Mr Maroun Rahme, are in a position to provide security. The evidence also establishes that the other shareholder in Webuildem, Jewelsands Pty Ltd has no assets of any value and that the Naga Kanala Trust has a deficiency in the order of $540,000.
In that regard, Ms Athitakis, the sole individual shareholder in Webuildem, and clearly a person "standing behind" the company, has offered to provide a personal undertaking to pay any costs ordered against the company. However, that undertaking is of little comfort to the Bank as Ms Athitakis's own evidence reveals that she has few assets and that her liabilities exceed her assets by some $1.15 million (see Epping Plaza Fresh Fruit & Vegetables v Bevendale Pty Ltd [1999] 2 VR 191 at [23] - [24], per Winneke P and Phillips JA; cited with approval in Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276; NSWCA 291per Mason P at [2] and McClellan CJ at CL at [79]; and see Prynew Pty Ltd v Nemeth [2010] NSWCA 94 per Beazley JA at [45]).
Ms Athitakis gave unchallenged evidence that if security is ordered as sought by the Bank, the proceedings will be "prematurely ended".
Mr Pritchard drew attention to the familiar observations of Clarke J (as his Honour then was) in Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542, that the fact that an order for security will stifle proceedings does not automatically lead to a refusal to order security but "will usually operate as a powerful factor in favour of exercising the Court's discretion in the plaintiff's favour" (at 545).
Mr Pritchard accepted where likely stultification of proceedings is cited as an answer to an application for security this kind, the Court may have regard to evidence of the financial position of those who stand behind the respondent to the application and those who will benefit from the litigation if it is successful: Bell Wholesale Co Pty Ltd v Gates Export Corp (No. 2) (1984) 2 FCR 1; FCA 34 at 3-4.
Mr Lo Surdo drew attention to the observations of Hodgson JA in Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd (2008) 67 ACSR 105; NSWCA 148 at [8] (recently cited with approval by Ward JA in Ballard v Brookfield Australia Investments Ltd [2013] NSWCA 82):
"To the extent that a party asserts that an order that security be provided would stultify the proceedings, it must satisfy the Court that those who stand behind it or stand to benefit from its success in the proceedings are unable to provide security for costs.... A proceeding cannot be regarded as stultified unless those who stand behind the impecunious plaintiff are unable (not unwilling) to provide the requisite security for costs.
An important factor informing the exercise of the discretion is the existence of persons who stand behind an impecunious plaintiff who seek to take the benefit of our system of justice (that is, share of the proceeds of victory) without the corresponding burden (that is, a potential adverse costs order)...". (at [8] - [9]) (citations omitted)
Here, the persons who are said to "stand behind" or "stand to benefit" from the litigation are Mr Rebek (Ms Athitakis's father) and Mr and Mrs Rahme Senior (Mr Maroun Rahme's parents).
Mr Rebek is said to "stand behind" Webuildem for the reason that he has funded the costs of these proceedings to date, provided the $75,000 security pursuant to the orders of 9 August 2013 and originally loaned the sum of not less than $734,108.07 for the acquisition and development of the Mortlake property.
Mr Rebek, who is 71 years of age, gave unchallenged evidence that his only assets of substance are funds in a number of superannuation accounts and stated:
"I confirm that over the past 12 month I have withdrawn the sum of $273,500 from my superannuation to pay the monthly expenses and to assist my daughter [Ms Athitakis] with the proceedings against the Arab Bank Australia Ltd including payment of $75,000 for the initial security for costs application...
At the time the original application was made [by the Bank] for security for their costs, I was aware that my daughter was unable to pay the agreed amount of $75,000 as Arab Bank Australia Ltd had appointed a manager over the assets of Webuildem Pty Ltd.
At that point in time I had reserves to pay $75,000 as I was earning significantly more from my consultancy services than I am at present.
At present I do not have any available income to pay any further order for security if it is made by the court...
[The Bank] is seeking a further $250,000 security from Webuildem Pty Ltd. Hypothetically, if I were to be forced to pay such security, that would result in a residual balance in my superannuation of $137,178.42.
Given my current expenses as opposed to my earning capacity, that would result in having only enough money to survive for approximately two years.
Given that I am 71 years and my wife is 70 years old, the downturn in geological mining exploration and my current earning capacity, at present, I cannot afford to offer any further assistance to my daughter or Webuildem Pty Ltd if the Court orders them to pay further security into Court as I will not have any available funds to support my family after approximately two years."
Mr Pritchard submitted, and I accept, that the conclusion I should draw from this evidence is that if an order is made for security as sought by the Bank, Mr Rebek "cannot and reasonably will not provide the security or any further funding for this litigation". It may be that, assuming security is not ordered, and the proceedings continue, Mr Rebek will give further financial assistance to Webuildem. Indeed, Mr Pritchard submitted that, in those circumstances "as a matter of good grace and favour and for love and affection for his daughter" Mr Rebek "may be prepared to provide some further funding". However, that matter was not explored with Mr Rebek in cross-examination (indeed, he was not cross-examined at all) and I do not consider it to have great significance on this application. This is because I am satisfied that, whether or not he chooses to lend further financial assistance to Webuildem, Mr Rebek will not provide any further security.
Mr Lo Surdo submitted that I should regard Mr Rebek as being in a position analogous to a litigation funder and drew attention to the further observations of Hodgson J in Green v CGU that a Court should be:
"...should be readier to order security for costs where the non-party who stands to benefit from the proceedings is not a person interested in having rights vindicated, ...but rather is a person whose interest is solely to make a commercial profit from funding the litigation." (at [51])
I see no basis to conclude that Mr Rebek is making any "commercial profit" from funding these proceedings. He is doubtless motivated by his own interests in having Webuildem successfully prosecute these proceedings and thus assisting his defence in the Guarantee Proceedings. However, he is not otherwise going to "share the proceeds of victory" if Webuildem is successful (to use Hodgson JA's words in Green v CGU).
Mr Lo Surdo submitted that Mr and Mrs Rahme Senior also "stand to benefit" from Webuildem's success in these proceedings, as they are also defendants in the Guarantee Proceedings. So much may be accepted. But, like Mr Rebek, they will not otherwise "share the proceeds" of a victory by Webuildem.
In any event, it seems to me that the answer to these contentions lies in Ms Athitakis's evidence as follows:
"If the Court orders Webuildem to pay the security sought by the defendant, any of the individuals who seek to benefit from this litigation will not be able to provide that security".
Neither counsel drew my attention to this evidence during the course of argument. I noticed it after I reserved, and invited submissions as to its significance.
This evidence certainly contains an acknowledgment by Ms Athitakis that there are "individuals who seek to benefit from this litigation". Ms Athitakis is obviously referring to her father Mr Rebek and her parents in law, Mr and Mrs Rahme Senior.
But Ms Athitakis's statement, not objected to, or challenged in cross-examination (she was not cross-examined at all), is also evidence that none of those persons are able to provide security. This evidence is, in my opinion, sufficient to discharge Webuildem's evidentiary onus to make out a discretionary basis for refusing security.
Mr Lo Surdo drew attention to evidence that Mr and Mrs Rahme Senior sold their home at Double Bay for approximately $5.3 million late in 2012 and that, pursuant to an order made by Rothman J, had paid $1.7 million into Court pending the outcome of proceedings brought against them by their former solicitors (Phoenician Holdings Pty Ltd t/as Cadmus Lawyers v Rahme [2012] NSWSC 1604 at [26]). Mr Lo Surdo submitted that the evidence showed there was no mortgage registered on the title of the Double Bay property and that Webuildem has not adduced evidence as to the fate of the balance of proceeds of approximately $3.6 million or as to why some or all of those proceeds are not available to provide security.
But Webuildem has, by adducing evidence from Ms Athitakis to which I have referred, discharged the evidentiary onus that lay on it and was not obliged to prove that all or any of the proceeds of Mr and Mrs Rahme Senior's Double Bay property are in fact available to, or ought reasonably be made available to provide security. As the evidence stands, it is in my opinion a matter for speculation as to what happened to the balance of the proceeds of the Double Bay property.
Conclusion
In all those circumstances and although, as I have said, I see the question as being finely balanced, the conclusion to which I have come is that the Bank has failed to satisfy me that an order for security should be made.
The Bank's notice of motion of 11 April 2014 should be dismissed with costs.
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Decision last updated: 06 August 2014
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