Supreme Court New South Wales Medium Neutral Citation: Shoal Bay Beach Constructions No. 1 Pty Ltd v Mark Hickey and the persons listed in Schedule A to this Statement of Claim trading as at all material times Sparke Helmore (No 3) [2021] NSWSC 1238 Hearing dates: 28 September 2021 Decision date: 30 September 2021 Jurisdiction: Common Law Before: Adamson J Decision: (1) Set aside order (1) made by the Registrar on 26 November 2020 and, in lieu thereof, order that paragraphs 1 and 2 of the subpoena issued to Lawcover Insurance Pty Limited on 2 October 2020 be set aside. (2) Subject to an application for a different order being made in writing to my Associate within seven days hereof, order the plaintiff to pay the defendants' costs of the defendants' notice of motion filed on 22 December 2020. (3) Pursuant to s 1335 of the Corporations Act 2001 (Cth) and rule 41.21 of the Uniform Civil Procedure Rules 2005 (NSW), order the plaintiff to provide additional security in the amount of $100,000 by way of payment into Court or irrevocable bank guarantee issued by an Australian bank and releasable on order of the Court, such security to be provided within 14 days' hereof. (4) Subject to an application for a different order being made in writing to my Associate within seven days hereof, order the plaintiff to pay the defendants' costs of the defendants' notice of motion filed on 31 August 2021. Catchwords: CIVIL PROCEDURE — Subpoenas — Review of Registrar's refusal to set aside — Threshold in civil proceedings is higher than the criminal threshold of "on the cards" that relevant documents might be produced in response — No reasonable basis beyond speculation for supposing that documents produced in response will materially assist — Subpoena set aside COSTS — Security for costs — Application for further security for costs — Consideration of the purpose of an order for security for costs — Further security would not stultify the proceedings — Further security ordered Legislation Cited: Corporations Act 2001 (Cth), ss 601AD, 1335 Supreme Court Act 1970 (NSW), s 121 Uniform Civil Procedure Rules 2005 (NSW), rr 41.21, 49.19 Cases Cited: Alister v The Queen (1984) 154 CLR 404; [1983] HCA 45 Attwells v White (No 3) [2021] NSWSC 144 Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105 Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 ICAP Australia Pty Ltd v Moebes [2009] NSWSC 306 ICAP Australia Pty Ltd v BGC Partners (Australia) Pty Ltd [2009] NSWCA 307 KP Cable Investments v Meltglow Pty Ltd (1995) 56 FCR 189 One.Tel Ltd (in liq) - Sing Tel Optus Pty Ltd v Weston [2010] NSWSC 1491 Vintage Marine Art Pty Ltd v Henderson and Cremer (No 2) (2019) 101 NSWLR 77; [2019] NSWSC 252 Wollongong Coal Limited v Gujarat NRE properties Pty Ltd [2019] NSWSC 187; (2019) 139 ACSR 107 Category: Procedural rulings Parties: Shoal Bay Beach Constructions No. 1 Pty Ltd (Plaintiff) Mark Hickey and the persons listed in Schedule A to this Statement of Claim t/as at all material times as Sparke Helmore (Defendants) Representation: Counsel: D Weinberger (Plaintiff) J Burnett (Defendants) Solicitors: Di Girolamo Lawyers (Plaintiff) YPOL Lawyers (Defendants) File Number(s): 2019/204638 Judgment Introduction 1. By statement of claim filed on 2 July 2019, Shoal Bay Beach Constructions No 1 Pty Ltd (the plaintiff) seeks damages for alleged negligence against the members of a legal partnership known as Sparke Helmore (the defendants). The matter is listed for hearing for four days commencing on 8 November 2021. 2. By notice of motion filed on 22 December 2020, the defendants sought a review of the Registrar's refusal to set aside paragraph 1 of the subpoena issued on 2 October 2020 at the plaintiff's request to Lawcover Insurance Pty Limited (Lawcover). By notice of motion filed on 31 August 2021, the defendants sought increased security for costs (having already obtained security which was ordered following an earlier application). The relevant procedural background 1. Before turning to the applications, it is convenient to summarise the relevant procedural background. 2. The plaintiff was registered on 21 October 2013. Its sole director was Carmelo Mastronardo, who was also the plaintiff's secretary. The plaintiff's sole shareholder was Shoal Bay Beach Constructions Pty Ltd (the parent company). In about 2014, Shoal Bay Beach No 1 Pty Ltd (in liquidation) (Shoal Bay Beach) retained the defendants to act as its solicitors. On 18 June 2018, an order was made for the liquidation of Shoal Bay Beach. 3. By deed dated 13 March 2019, the liquidator of Shoal Bay Beach purported to assign to the plaintiff, for the sum of $20,000 and 15% of the net proceeds of the litigation, any cause of action which Shoal Bay Beach might have against the defendants. 4. On 2 July 2019, the plaintiff commenced these proceedings against the defendants. It was common ground that the plaintiff had no substantial assets and would be unable to meet any adverse costs orders against it. 5. By notice of motion filed on 25 October 2019 (the first application), the defendants sought security for costs in an amount of $90,000 by way of payment into Court or irrevocable bank guarantee. The first application was supported by the affidavit of Timothy Price sworn 25 October 2019. Mr Price deposed that the defendants had incurred costs (including fees and disbursements) of $10,213.34 to date. He estimated that the likely future costs to be incurred in defending the claim would be of the order of $144,500, exclusive of GST. His estimate was based on the length of the hearing being two days and senior and junior counsel being required at daily rates of $9,000 and $3,000 respectively. Mr Price deposed: "The above estimate as to future costs is based on the information presently available to me. It is difficult to give a more precise estimate at this time as it is not clear how the proceedings will proceed." 1. Mr Price also deposed that party/party costs could be expected to be approximately 60-70% of actual costs. On this basis, the defendants sought an order for security in the sum of $90,000 (being approximately 62% of the estimate). In the covering letter serving the notice of motion and Mr Price's affidavit, Mr Price said: "For the avoidance of doubt, our clients specifically reserve their rights to seek further security in the event the issues expand as the matter progresses." 1. On 16 January 2020, the Registrar ordered the plaintiff to provide security for the plaintiff's costs in the amount of $90,000 by 14 February 2020. Although the plaintiff did not comply with the order within the specified time, it ultimately paid $90,000 into Court. 2. On 21 March 2020, the parent company was deregistered. The effect of the deregistration was that all of the parent company's assets (including its shares in the plaintiff) vested in the Australian Securities and Investments Commission (ASIC): s 601AD(2) of the Corporations Act 2001 (Cth). 3. By document dated 18 June 2020, but not filed with ASIC until 14 September 2020, the parent company purported to transfer its shares in the plaintiff to Antonella Mastronardo, Mr Mastronardo's sister, for the sum of $1 and to appoint her as director and secretary of the plaintiff. The purported assignment was ineffective to transfer the shares, which had already vested in ASIC on 21 March 2020. As Ms Mastronardo's appointment as a director was not confirmed by the parent company within two months, it, too, was ineffective. 4. Until 23 September 2020, Mr Mastronardo was the parent company's sole director and shareholder. On that day, Mr Mastronardo was declared bankrupt. As a consequence, Mr Mastronardo's shares in the parent company vested in Katherine Barnet (his trustee in bankruptcy), and he was disqualified from being a director. 5. On 2 October 2020, the plaintiff issued a subpoena to produce in these proceedings to Lawcover. The notice to produce sought, in paragraph 1: "Copies documents sent, received, created or maintained by Lawcover constituting a notification by Sparke Helmore of circumstances that may give rise to a claim for indemnity by Sparke Helmore on LawCover for its liability to the Company, the Liquidator and/or the Plaintiff in these proceedings in the respect of the Legal Services." 1. On 22 October 2020, the defendants applied to set aside the subpoena. On 26 November 2020, the Registrar set aside paragraph 2, but not paragraph 1, and ordered the plaintiff to pay the defendants' costs of the application. Mr Price estimates the costs to be $9,338.21, excluding GST. As referred to above, on 22 December 2020, the defendants sought a review of the Registrar's refusal to set aside paragraph 1 of the subpoena issued to Lawcover. 2. On 18 April 2021, the plaintiff was deregistered (on the application of ASIC). The plaintiff's registration was reinstated on 10 May 2021. 3. On 24 May 2021, Mr Price, having learned of the matters referred to above (including that the plaintiff had no director), wrote to the plaintiff's then solicitor, John Tomaras of William Roberts Lawyers. On 3 June 2021, the defendants filed a notice of motion for orders which included an order to strike out the proceedings on the basis that the plaintiff had no director and therefore no one who was competent to give instructions on its behalf. Until this matter was rectified, it was reasonable for the defendants not to take any further steps to progress the matter to final hearing since it was by no means clear that the plaintiff would prosecute its claim against the defendants. 4. On 1 July 2021, Ms Mastronardo filed an application in the Corporations List in the Equity Division for orders, which included an order to reinstate the parent company and an order to validate her appointment as a director of the plaintiff. On 12 July 2021, Ward CJ in Eq dismissed the application (on the basis that it was not properly constituted) and ordered the plaintiff to pay the defendants' costs of the application. According to Mr Price, the defendants incurred a total of $21,221.50 in costs with respect to that application. 5. The defendants' motion to strike out the proceedings came before me on 19 July 2021. I ordered that the proceedings be stayed. 6. On 2 August 2021, a further application was made in the Corporations List in the Equity Division for orders including reinstatement of the parent company. Ms Barnet (in her capacity as Mr Mastronardo's trustee in bankruptcy) was the first-named applicant and Ms Mastronardo was the second-named applicant. 7. On 6 August 2021, Rees J, as the Corporations List Judge, made orders and directions, which included the following: "1. The Court notes: a. Daniel Paul Fah, a chartered accountant, has consented to be appointed director of [the plaintiff] within two business days of the making of these Orders. b. The first applicant, Katherine Elizabeth Barnet in her capacity as trustee of the bankrupt estate of Carmelo Adrian Mastronardo, undertakes to the Court to appoint Daniel Paul Fah as director of the [plaintiff] within two business days of the making of these Orders. c. The first applicant undertakes to the Court to not appoint the second applicant, Antonella Maria Mastronardo, as director of the parent company and the [plaintiff]. d. The second applicant undertakes to the court to not accept any appointment as director of [the parent company] and [the plaintiff]. Reinstatement of registration 2. Order pursuant to section 601AH(2) of the Corporations Act 2001 (Cth) that [the parent company] be reinstated. 3. Order that, within two business days, [the parent company] be placed into liquidation and Andre Lakomy be appointed liquidator." 1. Her Honour reserved the costs of the application. The decision remains reserved. The submission made by the applicants before Rees J (Ms Barnet and Ms Mastronardo) was that the costs of the application ought be the costs in the cause of the proceedings in the Common Law Division (that is, the present proceedings). I understood it to be common ground that, as a result of the orders made, and matters noted, by Rees J on 6 August 2021, the present proceedings were properly constituted, as the plaintiff had a director (Mr Fah) who could give instructions on its behalf and that Ms Mastronardo was the plaintiff's sole shareholder. 2. On 12 August 2021, I ordered the plaintiff to pay the defendants' costs of the strike-out motion. On 6 September 2021, I ordered that the costs, which the plaintiff was ordered to pay on 12 August 2021, be paid in the gross sum of $25,000 from the monies paid into Court by the plaintiff as security for the defendants' costs of the proceedings. 3. On 9 September 2021, the plaintiff's solicitors, William Roberts Lawyers, filed a notice of ceasing to act. On 24 September 2021, the plaintiff appointed new solicitors to act on its behalf, Di Girolamo Lawyers. The review of the Registrar's decision 1. This Court's jurisdiction to review the Registrar's decision to refuse to strike out paragraph 1 of the subpoena to Lawcover derives from s 121(3) of the Supreme Court Act 1970 (NSW) and r 49.19(1) of the Uniform Civil Procedure Rules 2005 (NSW). Various reasons have been advanced on behalf of the plaintiff as to why the Registrar was correct not to set aside paragraph 1 of the subpoena. However, at the hearing before me, Mr Weinberger, who appeared on behalf of the plaintiff, accepted that the only legitimate forensic purpose of paragraph 1 was to obtain evidence of admissions made by the defendants to their insurer, Lawcover, and that this purpose was sufficient to justify the Registrar's decision. Thus, he contended that, whatever reasons had been given in the past were immaterial, since the subpoena had been issued for a legitimate forensic purpose. 2. Although it is possible that the defendants made an admission of negligence in its communications with Lawcover, this is no more than speculation. While it has been held that, in criminal proceedings, it is sufficient if it is "on the cards" that relevant documents might be produced in answer to a subpoena (a phrase taken from Alister v The Queen (1984) 154 CLR 404; [1983] HCA 45, which were criminal proceedings), the threshold for civil proceedings is somewhat higher. In One.Tel Ltd (in liq) - Sing Tel Optus Pty Ltd v Weston [2010] NSWSC 1491, Ward J, after reviewing the authorities, including ICAP Australia Pty Ltd v BGC Partners (Australia) Pty Ltd [2009] NSWCA 307 (in which an appeal against an order made in ICAP Australia Pty Ltd v Moebes [2009] NSWSC 306 was dismissed), said: "[30] In civil proceedings, however, the 'on the cards' test has not been broadly embraced. In ICAP, Nicholas J expressed caution in the application of a test which incorporates a phrase such as 'on the cards' or 'could possibly throw light on' when the legitimate forensic purpose of a subpoena is challenged. [31] Applying in this case the test in civil proceedings, as stated by Nicholas J in ICAP (namely that 'it must be shown that it is likely the documentation will materially assist on an identified issue, or there is a reasonable basis beyond speculation that it is likely that the documentation will', at [30]) and noting that it must be reasonable to infer that the documents so sought exist, a careful consideration is required of the issues in the proceedings to which the subpoenaed documents are or may be of relevance in order to assess whether there is a legitimate forensic purpose served by the subpoena." 1. Mr Weinberger did not contend that there was a reasonable basis beyond speculation for supposing that it is likely that the documentation will materially assist (that is, that the documents caught by the subpoena will contain an admission by the defendants of their negligence). He argued that he would be entitled to cross-examine the defendants' representatives on whether they had made admissions of negligence and that, accordingly, he ought be entitled to be in a position to test the answers by obtaining Lawcover's documents. I do not regard this potential as meeting the threshold for civil proceedings: see also Attwells v White (No 3) [2021] NSWSC 144 at [25], where I rejected a similar application. In these circumstances, paragraph 1 of the subpoena ought to have been set aside by the Registrar, and this Court, on review, ought make such an order. The application for further security for costs 1. The defendants seek additional security for costs in the amount of $215,000. This amount comprised Mr Price's estimate of the further recoverable costs incurred and to be incurred by the defendants in defending the proceedings: $160,000 of future costs and $55,000 of costs already incurred. It was common ground that, as the plaintiff did not have means, the Court has jurisdiction to order security for costs. 2. I note that the amount sought does not include the costs incurred by the defendants with respect to the applications made in the Corporations List referred to above, in which the defendants appeared as amicus curiae. 3. Mr Burnett, who appeared for the defendants, contended that it was always open to the defendants, who had obtained an order for security for costs, to apply to "top up" the security ordered if the original estimate proved to be inadequate or there was a change in circumstances which would expose the defendants to an increased risk that the plaintiff would not be able to meet an adverse costs order. 4. Mr Weinberger adduced evidence which, if accepted, showed that Ms Mastronardo owned real estate worth in the order of $800,000-$825,000, which was subject to secured loans which totalled about $400,000, leaving equity in the order of $425,000. He submitted that, if I considered that further security for costs ought be ordered, it was appropriate that it be provided in the form of an undertaking by Ms Mastronardo that she would be liable for the costs up to a particular amount (being the amount of the additional security ordered). 5. Mr Burnett submitted that there had been a change of circumstances since security in the amount of $90,000 had been ordered, including that the estimated length of the hearing had doubled from two days to four days and that various interlocutory steps had eroded the sum of $90,000 which had been paid into Court. 6. Mr Weinberger submitted that the only relevant change in circumstances was the gross sum costs order in the sum of $25,000 which I made on 6 September 2021, which depleted the security already provided by that amount. He submitted that an erroneous initial estimate did not warrant further security being ordered. He submitted further that the total sum of $215,000 was excessive and ought not be allowed. Further, he submitted that any further security ought not include past costs. 7. The purpose of an order for security for costs in the present context is to ensure that the person who stands to benefit from litigation (in this case, Ms Mastronardo and the parent company's liquidated estate) brought by an impecunious plaintiff ought also bear the burden of an adverse costs order (which would otherwise go unpaid because of the plaintiff's impecuniosity): Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 at 533 (Connolly J, Campbell CJ and Demack J agreeing). Ms Mastronardo is, in effect, an investor, having paid money to the parent company's liquidator for the cause of action which the parent company might have against the defendants. It can be inferred that she did so for a financial return, rather than to vindicate a right: see Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105 at [51] (Hodgson JA). 8. There is no evidence that an order for further security would stultify the proceedings. To the contrary, Ms Mastronardo would appear, from the limited material tendered on behalf of the plaintiff, to have substantial equity in real estate which could be made available for security. As the person who stands to gain if the plaintiff succeeds in its claim, it is appropriate that Ms Mastronardo make her own resources available by way of security: Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 3-4. 9. As a matter of discretion, I am persuaded that further security ought be ordered. The defendants brought the original application promptly. Mr Price's estimate was, accordingly, made at an early stage of the proceedings, when he had little more than his extensive experience as a litigation solicitor to guide him as to the likely amount of costs to be incurred. The proceedings have taken longer to be brought to hearing than might have been expected at that stage. It is notorious that the longer litigation takes to get to hearing, the more expensive it becomes. The circumstances have changed sufficiently for further security to be ordered. I do not regard the present as being a case such as was referred to by Brereton JA in Vintage Marine Art Pty Ltd v Henderson and Cremer (No 2) (2019) 101 NSWLR 77; [2019] NSWSC 252 at [13] (Bell P and Macfarlan JA agreeing) where the issue ought be regarded as having been determined once and for all when security was first ordered. It is not necessary that the Court expressly reserve the defendants' right to apply for further security, if notice is otherwise given, as it was in the present case. 10. Further, although the costs incurred by the defendants in the Corporations List applications are not included in Mr Price's estimate, it was common ground that the only reason the orders were required was to regularise these proceedings, the plaintiff's only asset being its cause of action against the defendants. Further, as referred to above, the applicants in the Corporations List contended that the appropriate order for costs of the second application was that the costs be the costs in the cause (in the present proceedings). 11. If further security is not ordered, the defendants would be left to bear the cost of the litigation without the prospect of adequate recovery in the event that they are ultimately successful. The plaintiff has been on notice throughout (from correspondence sent by the defendants' solicitors from the time of the first application for security) that the defendants reserved the right to bring a further application. That the application for further security was brought relatively close to the commencement of the hearing (on 8 November 2021) is not a matter which should count against the defendants since much of 2021 has been taken up with the plaintiff's efforts to regularise its own position, in terms of its director and shareholder. These matters do not affect the validity of Mr Price's original estimate, but rather, the increased costs to be incurred (in part as a result of the time it has taken for the proceedings to be ready for hearing and in part as a result of other factors) expose the defendants to the inevitability that, if they succeed in defeating the plaintiff's claim, they will have to bear a substantial portion of their own costs since the plaintiff is, in effect, a worthless shell of a company. 12. As mentioned above, the estimated future costs are about $160,000 and costs of $55,000 have been incurred. Mr Weinberger submitted that the proceedings are, and always have been, relatively straightforward, with few witnesses and few issues. He contended, on the basis of Mr Tomaras' opinion, and generally, that the estimates of costs to be incurred were excessive. It was common ground that it was appropriate that a broad-brush approach to security ought be adopted because of the difficulties of predicting party/party costs in advance of a hearing. Such estimates can be fortified by evidence of solicitors: see Wollongong Coal Limited v Gujarat NRE properties Pty Ltd [2019] NSWSC 187; (2019) 139 ACSR 107 at [65] (Ward CJ in Eq). There is force in Mr Weinberger's submissions about the quantum sought. Having regard to Mr Weinberger's commendable efficiency in conducting interlocutory applications on behalf of the plaintiff, I consider that the final hearing is likely to be concluded well within the estimate. In all the circumstances, I consider that further security ought be ordered in the amount of $100,000. 13. As to the form of the security, Mr Weinberger submitted that the Court ought accept Ms Mastronardo's undertaking and that the security ought not be required to be paid into Court or given in the form of an irrevocable bank guarantee. I am not persuaded that it would be fair to the defendants to be required to enforce an undertaking when the evidence suggests that Ms Mastronardo could raise the funds by charging her considerable equity in real estate: see KP Cable Investments v Meltglow Pty Ltd (1995) 56 FCR 189 at 204D (Beazley J). Costs 1. The parties agreed that I should make a default costs order but make provision for the parties to seek a different order if the plaintiff or the defendants considered the default order not to reflect the appropriate consequence of my orders. Orders 1. For the reasons given above, I make the following orders: 1. Set aside order (1) made by the Registrar on 26 November 2020 and, in lieu thereof, order that paragraphs 1 and 2 of the subpoena issued to Lawcover Insurance Pty Limited on 2 October 2020 be set aside. 2. Subject to an application for a different order being made in writing to my Associate within seven days hereof, order the plaintiff to pay the defendants' costs of the defendants' notice of motion filed on 22 December 2020. 3. Pursuant to s 1335 of the Corporations Act 2001 (Cth) and rule 41.21 of the Uniform Civil Procedure Rules 2005 (NSW), order the plaintiff to provide additional security in the amount of $100,000 by way of payment into Court or irrevocable bank guarantee issued by an Australian bank and releasable on order of the Court, such security to be provided within 14 days' hereof. 4. Subject to an application for a different order being made in writing to my Associate within seven days hereof, order the plaintiff to pay the defendants' costs of the defendants' notice of motion filed on 31 August 2021. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 September 2021