FEDERAL COURT OF AUSTRALIA Sylverton Pty Ltd v Minter Ellison [2011] FCA 1072 Citation: Sylverton Pty Ltd v Minter Ellison [2011] FCA 1072 Parties: SYLVERTON PTY LTD ACN 105 353 820 (CONTROLLER APPOINTED) v MINTER ELLISON (A FIRM) File number: VID 390 of 2011 Judge: KENNY J Date of judgment: 20 September 2011 Catchwords: COSTS – security for costs – applicant's impecuniosity not in issue – whether impecuniosity caused by conduct of respondent – security for costs granted – quantum of security – exercise of discretion – security granted in the amount of $170,000 Legislation: Trade Practices Act 1974 (Cth) Federal Court of Australia Act 1976 (Cth) Corporations Act 2001 (Cth) Federal Court Rules 2011 (Cth) Cases cited: BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 Right Home Improvements International Pty Ltd v Imperial Alarm Screens (Aust) Pty Ltd (1986) ATPR 40-641 Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440 Zen Foundation One P/L & Ors v Sippy Downs Group P/L & Ors [2009] QSC 334 Zen Foundation One Pty Ltd & Ors v Sippy Downs Group Pty Ltd & Ors [2010] QCA 232 Appleglen Pty Ltd v Mainzeal Corporation Pty Ltd (1988) 79 ALR 634 Equity Access Ltd v Westpac Banking Corp (1989) ATPR 40-972 Fiduciary Ltd v Morning Star Research Pty Ltd (2004) 208 ALR 564 Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 CBS Records Australia Ltd v Telemark Teleproducts (Aust) Pty Ltd (1987) 72 ALR 270 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 Gartner v Ernst & Young (No 3) [2003] FCA 1437 Farmitalia Carlo Erba SrL v Delta West Pty Ltd (1994) 28 IPR 336 Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114 Date of hearing: 19 September 2011 Date of last submissions: 16 September 2011 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 31 Counsel for the Applicant: Mr L Watts Solicitor for the Applicant: Madisons Counsel for the Respondent: Mr P Riordan SC Solicitor for the Respondent: Monahan + Rowell IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 390 of 2011 BETWEEN: SYLVERTON PTY LTD ACN 105 353 820 (CONTROLLER APPOINTED) Applicant AND: MINTER ELLISON (A FIRM) Respondent JUDGE: KENNY J DATE OF ORDER: 20 SEPTEMBER 2011 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. Within 60 days of the date of this order, the applicant provide security in the amount of $170,000 in a manner satisfactory to the respondent and, failing agreement by the respondent, then to the satisfaction of the Victoria District Registrar of the Federal Court of Australia. 2. The security for costs referred to in paragraph (1) above will be security for the respondent's costs up to the first day of trial. 3. Unless the applicant provides the security by 19 November 2011 in conformity with paragraph (1), the proceeding be stayed. 4. The respondent have liberty to apply to the Court for the provision by the applicant of further security for costs 5. The applicant pay the respondent's costs of the application for security, notice of which is dated 9 August 2011. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 390 of 2011 BETWEEN: SYLVERTON PTY LTD ACN 105 353 820 (CONTROLLER APPOINTED) Applicant AND: MINTER ELLISON (A FIRM) Respondent JUDGE: KENNY J DATE: 20 SEPTEMBER 2011 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 By an application and statement of claim filed on 13 May 2011, the applicant claims damages in respect of misrepresentations said to have been made by the respondent, a firm of solicitors, in providing legal advice concerning a deed of release. The applicant claims that, by its misleading or deceptive conduct, the respondent breached the Trade Practices Act 1974 (Cth); and acted in breach of its duty of care to, and its retainer with, the applicant. The applicant claims that, as a result, it has suffered financial loss. The respondent denies that it has committed any such breaches and that it has caused the applicant any loss. 2 The applicant, Sylverton, is a property investment and development company, incorporated for the purpose of acquiring land at Sippy Downs, which entered into contracts for the purchase of certain property. The circumstances surrounding the relevant transactions are not straightforward – a fact reflected in a very lengthy statement of claim. The parties agreed that, for present purposes, the Court might rely on the respondent's statement of background facts at pars [8] to [22] of its written submissions, with the exception of par [17] lines 6 and following, which are contested. This is not to say that there are not other significant contested facts: see, for example, respondent's submissions par [29(b)] and affidavit of Timothy Murray of 16 September 2011. It suffices to say that the applicant alleges that it relied upon the alleged misrepresentations made by its solicitors in executing a deed of release and settlement. 3 By an interlocutory application of 9 August 2011 the respondent seeks an order for security for costs under s 56 of the Federal Court of Australia Act 1976 (Cth) (the 'Federal Court Act'), the Federal Court Rules, or s 1335 of the Corporations Act 2001 (Cth) ('Corporations Act') in the amount of $876,476.40, alternatively, $652,172.20. 4 For the reasons I am about to state I would make a security for costs order, although not in the amount sought. 5 For present purposes, it is enough to refer to s 56 of the Federal Court Act, which provides that: (1) The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her. (2) The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs. (3) The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given. (4) If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed. (5) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security. See also Rule 19 of the Federal Court Rules 2011 (Cth) (equivalent to O 28 of the previous Rules) and s 1335 of the Corporations Act. 6 The respondent's application is supported by affidavits of D J A Clancy sworn on 9 August 2011, together with its annexures, and on 19 September 2011. Mr Clancy is a solicitor with conduct of the matter for the respondent under the supervision of the partners of the firm which employs him, Monahan + Rowell. The respondents also relied on an affidavit of C B Charlton sworn on 16 September 2011 and an affidavit of J A Young sworn on 16 September 2011. 7 In opposition Sylverton relied on the affidavits of T Murray sworn on 13 September 2011 and 16 September 2011, with their annexures. Mr Murray is the company's director. Sylverton also relied on affidavits of S A Dunn sworn on 12 and 15 September 2011 and the affidavit of D M Paver sworn on 12 September 2011. 8 The affidavit of Mr Clancy and the annexures thereto establish that Sylverton's financial situation is such that it would be unable to pay the respondent's costs if ordered to do so. The respondent relies on the following considerations in support of this submission: (a) the Report as to Affairs of Sylverton filed with ASIC on 15 December 2010 shows that: (i) the amounts owing under the fixed and floating charges to Golden Portfolio Pty Ltd, Platinum Twist Two Pty Ltd and TVnow.com.au Pty Ltd total $3,285,204; (ii) unsecured creditors total $120,200; (iii) the sole asset is cash at the bank of $54,963. (b) the shareholders of Sylverton are Rearden Steel Pty Ltd, Platinum Twist Two Pty Ltd (earlier Platinum Twist Pty Ltd) and Golden Portfolio Pty Ltd. (c) the relationship between the shareholders of Sylverton and the charges include: (i) Timothy James McGary was a director of Sylverton until 21 January 2010 and was a director and secretary of Platinum Twist/Platinum Twist Two until 25 August 2006; (ii) Mr Timothy Douglas Murray is a director of Sylverton, one of the two controllers of Sylverton and a director and secretary of Golden Portfolio; (iii) Mr Donald John Blanksby is a director and secretary of Sylverton, one of the two controllers of Sylverton and the director and secretary of TVnow.com.au. (d) Sylverton has been in external administration since 11 November 2010. (e) Searches reveal that Sylverton does not own any land in Queensland, New South Wales or Victoria. (f) Sylverton does not presently trade and its only activity consists of this proceeding. 9 Sylverton has not disputed its impecuniosity, or that it has been impecunious at least since the date of the charges, ie, 25 November 2004. In its written submissions, Sylverton conceded that it would be unable to meet any costs order in the event it were unsuccessful at trial. 10 Sylverton opposes an order for security being made against it on the basis of the strength and bona fides of its case. Sylverton also alleges that it is impecunious as a result of the respondent's conduct. As the respondent noted, however, Sylverton carries the onus of persuading the court that it should accept this latter proposition: see BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 345; and Right Home Improvements International Pty Ltd v Imperial Alarm Screens (Aust) Pty Ltd (1986) ATPR 40-641. Ordinarily, before it could accept this proposition as to the cause of impecuniousness, the court would need to form a provisional view as to the strength of Sylverton's case: see Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440 at 441. 11 In addition to the affidavits of Mr Murray, Sylverton relied on the evidence of Mr Charlton given at a trial in the Queensland Supreme Court, the findings of the trial judge (in Zen Foundation One P/L & Ors v Sippy Downs Group P/L & Ors [2009] QSC 334) and statements made in the reasons for judgments delivered in the Queensland Court of Appeal (in Zen Foundation One Pty Ltd & Ors v Sippy Downs Group Pty Ltd & Ors [2010] QCA 232) in support of its contention that there was a high probability of it succeeding and that the respondent's conduct was responsible for its present impecunious situation. It must be borne in mind, however, that, as the pleadings show, this is not a straightforward case; and the resolution of it may depend on a number of complex issues. Further, it must be borne in mind that the proceeding in the Queensland Supreme Court was between different parties and involved different issues from the present, even though the transactions or some of the transactions in question were the same. I have, moreover, only been taken to a small portion of Mr Charlton's evidence. Bearing all this in mind, it is difficult at this stage to form even a provisional view as to Sylverton's prospects of success or the role that the respondent has played in its impecuniosity. 12 The difficulty of forming a view at this stage of the kind for which Sylverton contends is emphasized by the respondent's reference to other statements in reasons for judgment of McMurdo P and Applegate J in the Queensland Court of Appeal, in Zen Foundation One Pty Ltd & Ors v Sippy Downs Group Pty Ltd & Ors [2010] QCA 232, which indicated that Sylverton's case was not straightforward and depended on the resolution of some difficult issues. 13 As a general rule, in an application such as this, the Court will not delve into the details and complexities of the case for the purpose of determining the prospects of the applicant's succeeding in the action: see Appleglen Pty Ltd v Mainzeal Corporation Pty Ltd (1988) 79 ALR 634 and Equity Access Ltd v Westpac Banking Corp (1989) ATPR 40-972. This is a case where the wisdom of this course is plain enough. As already noted, the circumstances in question are not straightforward. Their complexity makes it impossible to form even a provisional view of the kind for which Sylverton contends. 14 Furthermore, at the hearing today, counsel for the respondent noted, without demur from Sylverton, that Sylverton entered into the charges mentioned earlier some six months before the events in question and was unable to settle its contractual obligations at the relevant time. It was on the basis of these events that the respondent contended that Sylverton was already impecunious by the time of the transactions in question. Whether or not the respondent is correct does not fall for determination now. What one can say is that this was not a situation like that referred to in Fiduciary Ltd v Morning Star Research Pty Ltd (2004) 208 ALR 564 at 585 [88], where it was clear that a successful business was rendered unsuccessful after the defendant's intervention. Having regard to the foregoing matters, Sylverton has not discharged its onus of persuading the Court that the respondent was the cause of its impecuniosity. 15 As the respondent said, the evidence disclosed that the proceeding had been brought for the benefit of secured creditors, related to the shareholders of Sylverton. There was no evidence that these secured creditors were without means and that an order for security for costs would stifle the proceedings. 16 The principles concerning security for costs are well settled. Whilst the discretion conferred by s 56 of the Federal Court Act must be exercised judicially, the Court's discretion under the statutory provision is broad and unfettered: see Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 3. The Court may order security for costs in the exercise of its discretion, after considering all the circumstances of the case. 17 The question is whether the Court should, in the exercise of its discretion, award security for costs in the respondent's favour. The onus of establishing that security should be granted lies with the respondent: see CBS Records Australia Ltd v Telemark Teleproducts (Aust) Pty Ltd (1987) 72 ALR 270 at 284-285 (Bowen CJ). 18 There are numerous factors that may be relevant to the Court's exercise of discretion, including the nature of the risk that Sylverton will not be able to satisfy a costs order if made against it and in the respondent's favour. Other factors may also be relevant such as the nature of the applicant's claim, including the chances of success, whether an order for the giving of security would operate to prevent the applicant from pursuing the claim, and whether the applicant's impecuniosity arises from the conduct the subject of the proceeding. This list of factors is not exhaustive, and there may be other discretionary factors, some of which are mentioned in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 197-198 and Gartner v Ernst & Young (No 3) [2003] FCA 1437 at [10]. In the circumstances set out above, particularly having regard to Sylverton's lack of assets and apparent inability to meet any costs order awarded against it and the lack of evidence that an order for security would stifle the proceeding, I conclude that it would be appropriate to make an order for the provision of security for costs. As noted above, I am not satisfied that any such order would stifle the proceeding or that Sylverton's impecuniosity is the result of the respondent's misconduct. Further, Sylverton has failed to persuade me that I should take any particular view about its prospects of success. 19 Security must be sufficient in the circumstances disclosed – an approach that requires consideration of the whole of the case. The principles are well-known. As Heerey J said in Farmitalia Carlo Erba SrL v Delta West Pty Ltd (1994) 28 IPR 336 at 342, the fixing of quantum is a discretionary exercise in which, besides any expert opinion evidence as to estimated costs, factors falling for consideration may include the chance of the case not proceeding to trial; the chances of success, if discernible; and the undesirability of stifling the proceeding, if such a risk exists. Here, as noted, there is no evidence about the financial position of those who would benefit from success in this proceeding and the chances of success are not presently discernible. 20 The parties' estimates as to the costs of the proceeding differed a great deal. Both parties relied on the expert opinions of costs lawyers, and these opinions also differed. 21 The respondent particularly relied on the report of Ms Young, a costs lawyer, dated 21 July 2011, estimating the respondent's legal costs of the proceeding at either $652,172.20 calculated under the present scale or $876,476.40 under the new scale. This report was annexure V to Mr Clancy's 9 August 2011 affidavit. The respondent also relied on Ms Young's 16 September 2011 affidavit, sworn in response to a report of Ms Paver relied on by Sylverton. Ms Young's affidavit drew attention to a number of pertinent differences between her approach and that of Ms Paver, including the extent of changes regarding the loading for care and skill introduced by the new scale, allowances for counsel, and the costs of discovery. 22 Sylverton relied on Ms Paver's affidavit of 12 September 2011, which annexed her report estimating the respondent's legal costs of the proceeding at $285,131.08, excluding the costs of drafting the defence. Excluding the costs of trial, Ms Paver's estimate was reduced to $160,000. In her report, Ms Paver set out a useful summary and comparison of the costs estimates made by her and Ms Young. 23 Ms Young and Ms Paver are both well qualified to speak on the assessment of costs. How should I resolve their conflicting evidence? Neither was cross-examined. 24 Counsel for each party each made submissions concerning the costs experts' reports. Counsel for the respondent submitted that Ms Paver's allowance for the cost of discovery was "too light" and drew attention to the respondent's view that it might call up to 12 witnesses, including an expert. Counsel for Sylverton argued that the respondent's estimate was excessive, particularly referring to the allowances for discovery and witness statements made by Ms Young. 25 Provisionally and doing the best I can, it seemed to me that Ms Young's estimate may have been based on an overly bleak view of the Court's ability to manage discovery and an overly cautious view about the preparation of witness statements. Against this, Ms Paver may have taken an overly optimistic view of various aspects of pre-trial preparation, especially the discovery called for in this case. The costs experts also expressed competing views about the operation of the new costs scale, which are at this stage largely untested. Broadly speaking, I accept Ms Paver's opinion evidence in preference to that of Ms Young, but my acceptance of Ms Paver's evidence is not complete. 26 Given that this application has been brought promptly, I would not exclude the costs of drafting the defence. This was not a case in which delay was a factor against making an order for security in respect of costs already incurred: contrast Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 125. 27 In this case too, whilst broadly speaking, I prefer Ms Paver's evidence to that of Ms Young, I am disinclined to discount Ms Paver's estimate further. This is because, just as a respondent might be overly pessimistic about the costs to be incurred in respect of discovery and the preparation of witness statements, the applicant has, so it seems to me, erred on the unduly optimistic side in respect of discovery and, possibly, the effect of the new costs scale. Further, in view of the uncertainties that are involved in making an accurate costs estimate at this stage of the proceeding, I consider that in this case it would be appropriate to exercise my discretion in favour of ordering security for costs up to the commencement of trial. 28 There is necessarily an element of imprecision in determining the quantum of security. Bearing all the above considerations in mind, however, I find a reasonable estimate of costs on a party/party basis up to the commencement of trial is $170,000. 29 I would order the provision of security in this amount on the basis that it will be open to the respondent to apply even before trial for further security if the circumstances appear to it to justify it in so doing. 30 Hence, for the reasons stated I would order that: (1) Within 60 days of the date of this order, the applicant provide security in the amount of $170,000 in a manner satisfactory to the respondent and, failing agreement by the respondent, then to the satisfaction of the Victoria District Registrar of the Federal Court of Australia. (2) The security for cost referred to in paragraph (1) above will be security for the respondent's costs up to the first day of trial. (3) Unless the applicant provides the security by 19 November 2011 in conformity with paragraph (1), the proceeding be stayed. (4) The respondent have liberty to apply to the Court for the provision by the applicant of further security for costs. 31 I would also order that the applicant pay the respondent's costs of this application for security. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny. Associate: Dated: 20 September 2011