FEDERAL COURT OF AUSTRALIA Angas Securities Limited v Savills (SA) Pty Ltd [2017] FCA 868 File number: SAD 343 of 2016 Judge: WHITE J Date of judgment: 20 July 2017 Catchwords: PRACTICE AND PROCEDURE – application for security for costs – applicant resists the application by reference to its claimed strong prospects of success in the litigation – preliminary evaluation of merits – application for security refused. Legislation: Corporations Act 2001 (Cth) s 1335(1) Federal Court of Australia Act 1976 (Cth) s 56(1) Trade Practices Act 1974 (Cth) s 52 Fair Trading Act 1987 (SA) s 56 Cases cited: Bray v F Hoffman-La Roche Ltd [2003] FCAFC 153; (2003) 130 FCR 317 Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 J & M O'Brien Enterprises Pty Ltd v The Shell Co of Australia Ltd (No 2) (1983) 70 FLR 261 Jodast Pty Ltd v A & J Blattner Pty Ltd (1991) 104 ALR 248 Mecrus Pty Ltd v Industrial Energy Pty Ltd [2015] FCA 103; (2016) 327 ALR 523 Date of hearing: 20 July 2017 Registry: South Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Regulator and Consumer Protection Category: Catchwords Number of paragraphs: 26 Counsel for the Applicant: Mr SA Evans Solicitor for the Applicant: Charlton Rowley Counsel for the Respondent: Mr IC Robertson SC with Mr P Bullock Solicitor for the Respondent: Wotton + Kearney Table of Corrections 9 August 2017 In the Appearance on the cover page in the field Counsel for the Applicant, the name of counsel has been amended from "Mr IC Robertson SC with Mr P Bullock" to "Mr SA Evans".. 9 August 2017 In the Appearance on the cover page in the field Counsel for the Respondent, the name of counsel has been amended from "Mr SA Evans" to "Mr IC Robertson SC with Mr P Bullock". ORDERS SAD 343 of 2016 BETWEEN: ANGAS SECURITIES LIMITED ACN 091 942 728 Applicant AND: SAVILLS (SA) PTY LTD ACN 008 068 513 Respondent JUDGE: WHITE J DATE OF ORDER: 20 JULY 2017 THE COURT ORDERS THAT: 1. The application for security for costs made by the Respondent on 11 May 2017 is dismissed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. EX TEMPORE REASONS FOR JUDGMENT WHITE J: 1 I am dealing with an application by the respondent in these proceedings (Savills) for an order that the applicant (Angas) provide security for its costs. 2 Angas advanced money to Wayville (283) Pty Ltd (W283) which was the owner and developer of a property at Goodwood Road, Wayville, a suburb of Adelaide. W283 was carrying out a residential and commercial property development on the property. Subsequently, W283 defaulted in its repayment obligations with the consequence that, after enforcing its security, Angas has suffered loss. 3 Angas pleads that it made an initial loan of $6.4 million to W283 on 13 March 2009 (Loan 341), that it replaced that loan with a loan of $8.7 million on 13 July 2009 (Loan 353), and that it replaced that loan with an advance of $13.824 million on or about 11 December 2009 (Loan 367). It pleads that, in making the loans on 13 March 2009 and 13 July 2009, it relied on a valuation provided by Savills on 2 October 2008 and on an update of that valuation provided by Savills on 10 March 2009. In relation to Loan 367, Angas pleads that it relied upon the 2 October 2008 valuation, the 10 March 2009 update, and a further updated valuation provided by Savills on 27 November 2009. It pleads that these valuations overstated significantly the value of the property and that, had Savills provided appropriate valuations, it would not have made the advances to W283. 4 Angas relies on three causes of action: breach of the contracts of retainer it had with Savills, breach of duty of care, and misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) and/or s 56 of the Fair Trading Act 1987 (SA). It seeks damages from Savills of just on $9 million. 5 Savills denies liability to Angas and the proceedings are listed for a five day trial in the week of 23 October 2017. 6 Savills seek the order for security pursuant to s 56(1) of the Federal Court of Australia Act 1976 (Cth) or s 1335(1) of the Corporations Act 2001 (Cth) and/or pursuant to the inherent jurisdiction of the Court. 7 Angas concedes the threshold matter to which s 1335(1) of the Corporations Act refers, namely, that there is reason to believe on the basis of credible testimony that it would be unable to pay the costs of Savills if Savills succeeds in its defence. Nevertheless, it contends that, in the exercise of the discretion, the Court ought not to order security in this case. It does so on two principal bases. 8 First, Angas contends that the Court should be satisfied now that it has strong prima facie prospects of success in the action and, in fact, goes so far as to describe its case on breach of duty as "overwhelming". Savills accepts that Angas has a bona fide and tenable claim and that its claims are supported by expert evidence. Savills also accepts that, if one puts to one side the defences it raises going to the causation of the loss alleged by Angas (including claims that supervening events have caused Savills' loss), the plea of contributory negligence and the plea of a failure by Angas to mitigate its loss, Angas appears to have a strong prima facie case. 9 It contends, however, that the Court should be satisfied that the defences just mentioned are also made bona fide and on a tenable basis so that the Court should proceed on the basis that, even if Angas does establish a breach of duty, a breach of retainer or misleading and deceptive conduct, it cannot be said that it has prima facie prospects of obtaining judgment in its favour. 10 It is established that, when claims in a proceeding are prima facie regular and disclose proper causes of actions, the Court may assume that the applicant has reasonable prospects of success. See Mecrus Pty Ltd v Industrial Energy Pty Ltd [2015] FCA 103; (2016) 327 ALR 523 at [41] and the authorities to which Murphy J referred therein. 11 Although there are some authorities which suggest that it can be inappropriate for a court on a security for costs application to consider as part of the exercise of the discretion the merits of the applicant's claim, I think it established that an applicant's prospects of success is a proper matter to be considered. In J & M O'Brien Enterprises Pty Ltd v The Shell Co of Australia Ltd (No 2) (1983) 70 FLR 261, Bowen CJ said at 264: One matter which is generally considered in relation to applications for security for costs in relation to proceedings at first instance is what prospects of success the plaintiff has in the proceedings. If the plaintiff has a strong and apparently meritorious case the court is reluctant to make an order which may have the effect of shutting the plaintiff out. See also the authorities cited by French J in Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 513-4 and Jodast Pty Ltd v A & J Blattner Pty Ltd (1991) 104 ALR 248 at 252 (Hill J). 12 Nevertheless, there are well recognised limitations on a court's ability to take account of the merits of an applicant's claim or of a respondent's defence. The court may not have sufficient material upon which to make the assessment, and often there are practical difficulties in making at the interlocutory stage a preliminary assessment of the evidence or in predicting the likely outcome of the litigation. The authorities reviewed by Murphy J in Mecrus indicate that the Court is not obliged to assess the merits of the claims at length and should not do so, unless it be demonstrated that there is a high degree of probability of success or failure. Nevertheless, as Finkelstein J observed in Bray v F Hoffman-La Roche Ltd [2003] FCAFC 153; (2003) 130 FCR 317 at [252]: … I think that the court should not shy away from making a preliminary evaluation of the merits. That task is not as difficult as it might seem. Every day judges are required to decide whether or not a party has made out a prima facie case, or has raised a serious issue to be tried, in an application for an interlocutory injunction, the appointment of a receiver or other serious forms of relief. 13 In the present case, Angas asserts that it has a strong prima facie case on the basis of computational errors which it has identified in the valuation model used by Savills. Its expert evidence identifies the existence of those errors and, Angas contends, demonstrates that the errors have resulted in the valuations being overstated by millions of dollars. 14 In broad outline, Angas contends that it is apparent that Savills approached the valuation using what is sometimes described as the hypothetical development approach by starting with an assessment of the "as if complete" value of the project and then deducting future construction costs and a "profit and risk margin" to arrive at an "as is" value for the partially completed development project. 15 In the valuation reports provided to Angas, Savills said that either a 22.5% or a 25% "profit and risk margin" would be appropriate. Despite saying this, Savills in fact used a much lower figure in its modelling, namely a 9.43% margin. On the computerised model used by Savills, that difference resulted in a significantly increased valuation. 16 The valuer within Savills who provided the valuations has made an affidavit which has been filed in the Court in accordance with the Court's trial programming orders. In that affidavit, the valuer has acknowledged the discrepancy identified by Angas but does not provide an explanation or justification for the discrepancy. In relation to the 2008 valuation, the valuer says only: I cannot now recall why there is an inconsistency between the profit and risk margin referred to in the body of the report and the profit and risk margin recorded in the computer worksheets. 17 In relation to each of the succeeding valuations, the Savills' valuer acknowledged that there was a corresponding inconsistency and again did not proffer an explanation or justification for what he had done. Angas contends that, it should be concluded that, by reason of this discrepancy alone it has strong prospects of success. 18 Angas also relies on the opinion as to value given by a valuer from McGees (Mr Brooke) who has been retained by Savills. Mr Brooke's estimates of value at relevant dates also differ to a significant extent from those made by Savills in the valuation reports provided to Angas. 19 Accordingly, Angas contends that the Court may be satisfied on the basis of the evidence presently available that it has a strong prima facie case and that the principal issues at trial will arise from the defence raised by Savills, namely, the issues of causation, contributory negligence and failure to mitigate. Angas contends that these are matters which will go to the quantum of the judgment rather than whether it will recover any judgment at all. 20 On my assessment, it is not desirable at the present time to attempt a more detailed assessment of the valuation evidence and of the deficiencies which Angas allege exist. Some are acknowledged by Savills and, as I have indicated, an answer has not been provided by way of justification. 21 I accept that my present understanding of the evidence is incomplete and may well change at the trial but, at the present time, I am of the view that there is some force in Angas' contention that it has a strong prima facie case. That means that the focus turns to the possible strength of the defences raised by Savills. 22 Counsel for Savills contends that the Court should proceed on the basis that the defences it has pleaded are made bona fide, are tenable and will have some support in the expert evidence which it is obtaining. However, counsel frankly conceded in the course of an exchange about the elements of the defences and the matters on which Savills relies that the strength of the defences could not be demonstrated without an expert report, and that Savills is still awaiting receipt of that report. 23 I am satisfied that the application should be decided on the evidence which is presently before the Court, noting in this respect that today's hearing was initially scheduled for 6 July 2017 and, against Savills' opposition, was adjourned until today. In other words, Savills have had even more time than it expected in which to obtain the evidence in which it relies to support its application for security. In those circumstances, I do not think that it is possible for the Court to form a view about the strength of the defences upon which Savills will rely. I am prepared to proceed on the basis that the defences are raised bona fide, although I think it fair to say that counsel had some difficulty in articulating some aspects of the defence, no doubt because of the absence of the expert report which Savills are still awaiting. 24 There are other matters which bear upon the discretion, apart from the strength of the applicant's case. In particular, I take into account the concession made by Angas that there is reason to believe that it will be unable to meet an order for costs in the event that it is unsuccessful in the litigation. That is a matter which is pertinent to the exercise of the discretion as well. It is also pertinent that Angas does not assert that, if an order for security was made, it would have the effect of stultifying its ability to bring the litigation. 25 It is, of course, for an applicant for security to establish the entitlement. Having regard to the matters which I have mentioned earlier bearing upon the strength of Angas' claim, I am not satisfied in the present case that the prospect of Savills suffering the detriment on which it relies for the application is sufficiently strong that an appropriate exercise of the discretion would be to order security. Accordingly, the application for security is refused. 26 That makes it unnecessary to consider the second basis upon which Angas resisted the application, namely, its critique of the amount of security claimed by Savills and of the evidence which it provided in support. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White. Associate: Dated: 31 July 2017