Supreme Court New South Wales Medium Neutral Citation: Financial Pty Ltd v Nicols (No 2) [2023] NSWSC 894 Hearing dates: 13 July 2023 Decision date: 03 August 2023 Jurisdiction: Equity Before: Robb J Decision: The plaintiff is to provide the defendant with a revised draft of its proposed second mortgage reflecting the conclusions stated in these reasons. The defendant may then suggest amendments, with the defendant's draft to be provided to the plaintiff and the Associate to Robb J for final determination by the Court. Catchwords: COSTS — security for costs — quantum and form — consideration of terms of second ranking mortgage appropriate to provide sufficient security to defendant Legislation Cited: Civil Procedure Act 2005 (NSW), s 101 Cases Cited: Financial Pty Ltd v Nicols [2023] NSWSC 306 Category: Costs Parties: Financial Pty Ltd (Plaintiff) Steven Nicols (In his capacity as Trustee in Bankruptcy for Rinaldo (Rick) Frank Albert Manietta) (Defendant) Representation: Counsel: A Macauley (Plaintiff/Respondent) M Elliot SC (Defendant/Applicant) Solicitors: Yeldham Price O'Brien Lusk (Plaintiff/Respondent) Colin Biggers & Paisley (Defendant/Applicant) File Number(s): 2022/00236204 Publication restriction: Nil JUDGMENT 1. The parties to these proceedings are the plaintiff, Financial Pty Ltd (Financial), and Mr Steven Nicols, the defendant. 2. On 13 September 2022, Mr Nicols filed a notice of motion in which he sought an order that Financial provide security for his costs of these proceedings in the amount of $430,000 by way of bank guarantee, funds paid into court, or other form of liquid security. 3. After a hearing on 17 March 2023, I published reasons for judgment on the notice of motion: Financial Pty Ltd v Nicols [2023] NSWSC 306 ("J"). 4. At J [19], I recorded that Mr Nicols' solicitor provided evidence in which he estimated that Mr Nicols' costs of the proceedings on the basis of a six-day hearing would be $453,620. 5. As recorded in J [22]-[23], the principal of Financial, Mr Farshad Amirbeaggi, made an offer to undertake to the Court to be jointly and severally liable with Financial to pay any amount of costs that Financial may be ordered to pay Mr Nicols in these proceedings. Mr Nicols rejected this offer. This matter is relevant to a dispute between the parties in which Mr Nicols submits that Mr Amirbeaggi should be required to covenant to Mr Nicols that he will pay the amount of any costs liability of Financial that Financial does not pay to Mr Nicols. I will return to this issue below. 6. I noted at J [30] that the valuation evidence before the Court was that a property of which Mr Amirbeaggi is the registered proprietor, which I called the Woollahra property for the purposes of the judgment, was $4 million. 7. I also noted at J [32] that the Woollahra property was subject to a first registered mortgage in favour of the National Australia Bank Ltd (NAB) to secure a debt owed by Mr Amirbeaggi of approximately $2 million. 8. In the circumstances where Mr Nicols had sought liquid security and Financial had offered a personal undertaking to the Court by Mr Amirbeaggi, I found at J [59] that Financial should be given a choice whether to pay the amount of the security into court (or provide a conventional alternative such as a bank guarantee) or to provide a mortgage over suitable real property, such as Mr Amirbeaggi's interest in the Woollahra property. I said that the Court would be open to submissions as to whether that mortgage should be in registrable form, and if not, the Court would receive submissions as to the terms that should be imposed upon Financial and Mr Amirbeaggi to ensure that the mortgage adequately protected Mr Nicols. 9. I found at J [60] that the appropriate amount of security for costs that Financial should provide was the $430,000 sought by Mr Nicols. I made that finding because that was the amount sought in the notice of motion, notwithstanding that Mr Nicols' solicitor provided evidence that estimated the amount of his costs at $453,620. I said, at J [62], however, that Mr Nicols should be given leave to make a further application for security for costs if the costs that he would incur were likely to exceed the amount of $453,620. 10. At J [63], I dealt with the costs of Mr Nicols' notice of motion by saying that they should be reserved to the hearing of these proceedings or further order. That was on the basis that, although Mr Nicols would succeed in obtaining an order for security for costs, the issue was relatively well-balanced, and that this may prove to be a case where the costs of the notice of motion should be the parties' costs in the cause. 11. At J [64], I required the parties to confer for the purpose of agreeing short minutes of order, if that was possible. 12. The parties have not been able to agree to short minutes of order to give effect to my reasons for judgment. That led to a further hearing taking place on 13 July 2023. These reasons deal with the dispute that was heard on that occasion. 13. Financial has elected to provide the required security for Mr Nicols' costs by way of the grant by Mr Amirbeaggi of a second registered mortgage over the Woollahra property, subject to the first registered mortgage granted to the NAB. Mr Nicols will only be able to register the mortgage granted to him with the consent of the NAB. It also came to light after the hearing of the notice of motion that a third party has lodged a caveat against the title to the Woollahra property to protect an alleged charge claimed by the caveator to secure money owing to the caveator by Mr Amirbeaggi. Neither the Court nor Mr Nicols has any information about the validity of the charge or the amount of the debt claimed by the caveator. In the circumstances, Mr Nicols will not be able to achieve registration of his second mortgage unless Mr Amirbeaggi procures the withdrawal of the caveat. 14. Financial has asserted that Mr Amirbeaggi will be able to obtain the consent of the NAB to the registration of the second mortgage in favour of Mr Nicols, as well as the withdrawal of the caveat, to enable that registration to take place, although there was no evidence that either the NAB or the caveator has yet given to Mr Amirbeaggi the agreement that Financial needs. 15. In these circumstances, the parties have submitted competing draft short minutes of order to the Court, and each party has annexed a draft mortgage containing different terms. 16. The Court notes that an earlier version of Financial's short minutes of order provided for the registration of a first, rather than a second, ranking mortgage in favour of Mr Nichols. In his affidavit made 20 June 2023, Mr Amirbeaggi's solicitor stated that he was informed by Mr Amirbeaggi that "if an order was made for the plaintiff to provide a mortgage over the Woollahra Property….the plaintiff and/or Mr Amirbeaggi are able to and will procure the discharge of the mortgage to NAB". This position was revised at the directions hearing on 21 June 2023, where counsel for the plaintiff informed the Court it would only be able to proffer a second ranking mortgage. 17. As I understand Mr Nicols' position, he has provided two alternative draft short minutes of order to the Court. The first has been drawn to reflect Mr Nicols' primary position that, as the necessary consents of the NAB and the caveator have not yet been obtained, and in all of the circumstances, the Court should order Financial to provide security for costs either by paying $430,000 into court, or by providing a satisfactory bank guarantee in favour of Mr Nicols. Draft order 1, which is to that effect, would have required that the security be provided by 4 PM on 20 July 2023. 18. This first version of Mr Nicols' draft short minutes of order is not consistent with the principal judgment. Financial has been given the choice that I have mentioned above, and it should only be deprived of its choice to provide security by way of a second registered mortgage over the Woollahra property, if it becomes apparent that a second mortgage will not be adequate security, or Mr Amirbeaggi is not able to obtain the necessary consents. 19. There is a separate issue as to whether Financial should be ordered to provide the security by a specified date. If no date is specified, and Financial does not provide the required security, Financial's claim will be stayed indefinitely. That is not a satisfactory outcome, as then Mr Nicols would be left in a litigation limbo. I consider that a date for the provision of the security should be imposed, but that 20 July 2023 would have been too early. Particularly if Financial wishes to keep the alternative of providing security by means of a second registered mortgage alive, the Court should place a limit on the time in which Financial must achieve that result. I consider that one month from the date of the making of the orders should be sufficient. 20. A further difference between the parties' draft short minutes of order that can conveniently be dealt with at this stage is the order for the costs of the notice of motion. Both versions of Mr Nicols' draft short minutes of order provide for the costs of the notice of motion to be reserved to the final hearing of the proceedings or further order. Financial seeks an order that the costs of the notice of motion should be costs in the cause. This issue has already been dealt with at J [63]. Although it may be likely that the ultimate costs order will be that the costs be costs in the cause, I have already ruled that the costs should be reserved to the hearing. 21. As I will not at this stage order Financial to provide liquid security, I will henceforth consider only Mr Nicols' alternative draft short minutes of order. Draft order 1 requires Financial to provide security for Mr Nicols' costs in the form of a mortgage in the terms annexed to the draft short minutes of order. Draft order 1 does not deal with the possibility that Financial will not be able to procure the registration of a satisfactory second mortgage over the Woollahra property in favour of Mr Nicols. Draft order 1 of Financial's proposed short minutes of order provides for Financial to provide security for Mr Nicols' costs by way of a second registered mortgage over the Woollahra property in the form of an annexed mortgage, whose terms are different from that proposed by Mr Nicols, "or otherwise depositing the sum of $430,000 with the Court". 22. In principle, the Court should not order Financial to provide security by way of a second registered mortgage, given that it is not yet certain that Financial will be able to achieve that result. I agree with Financial's alternative proposal that it should retain a choice and be able to deposit the sum of $430,000 in court if it cannot achieve registration of the second mortgage over the Woollahra property in favour of Mr Nicols. 23. That means the only remaining issue that requires resolution is whether the terms of the mortgage should be as suggested by Mr Nicols, or by Financial. Given the length of the respective terms, I will not set them out in full. As a general comment, the terms proposed by Mr Nicols are the more detailed and tend to equate to the terms that may be included in a commercial mortgage to secure a loan made by Mr Nicols to Mr Amirbeaggi. 24. I consider that the most significant issue that the Court must address concerns Financial only being able to offer a second registered mortgage over Mr Amirbeaggi's Woollahra property. For reasons that are obvious, a second mortgage provides much more risky security than a first mortgage. Although perfect security may not be achievable, the Court should only permit Financial to provide the security for costs by way of a second mortgage over the Woollahra property if it is satisfied, in all of the circumstances, that the risks inherent in this form of security have been adequately reduced. 25. The terms of the mortgage granted by Mr Amirbeaggi to the NAB were put into evidence. The mortgage secures "the amount owing", which is defined in a definition section at the end of the mortgage document under the heading "Key words". It is sufficient to note that the definition of "amount owing" means that the mortgage is what is commonly called an "all monies security". The mortgage document itself does not state the amount of the debt secured by the mortgage, or the terms of the loan, or whether the existing contractual arrangement between Mr Amirbeaggi and the NAB would permit Mr Amirbeaggi to draw down additional amounts of loan that would be secured by the existing mortgage. There is no information about whether Mr Amirbeaggi or any other party has, or in the future may have, loan arrangements with the NAB that could be cross-collateralised with the mortgage. The short point therefore is, that neither Mr Nicols nor the Court has any definite information about the amount that might be secured by the mortgage granted to the NAB at the time a costs liability of Financial to Mr Nicols may finally be determined. 26. The consideration of the level of security that will be provided by the second mortgage that Financial offers to procure should start by recognising that the subject property is a residence in Woollahra, and that the evidence shows that Mr Amirbeaggi's equity after the mortgage granted to the NAB is about four times the amount of the security for costs that must be provided. Furthermore, a lender as sophisticated as the NAB has been prepared to advance about $2 million on the security of the property, so it must have satisfied itself that its mortgage was sound, and the NAB is likely to monitor the performance by Mr Amirbeaggi of his covenants in the first mortgage. 27. However, Mr Nicols is entitled to be protected against the possibility that the amount secured by the first mortgage may increase substantially, and the fact that the mortgage is an all monies security introduces the risk that the first mortgage may come to secure increased or additional liabilities of Mr Amirbeaggi to the NAB. 28. A registered second mortgage whose effectiveness depends upon the performance of personal covenants by the mortgagor is not a sufficiently sound security. In principle, given that Mr Amirbeaggi is a solicitor of this Court, and given the serious consequences that may flow from the breach of an undertaking to the Court, it may be that deficiencies in the effectiveness of a second mortgage may be remedied if Mr Amirbeaggi is prepared to give appropriate undertakings to the Court. 29. I consider that a registered second mortgage granted by Mr Amirbeaggi to Mr Nicols over the Woollahra property should provide proper and adequate security to Mr Nicols, provided the following can be achieved: 1. Financial must procure a letter from the NAB addressed to Mr Nicols that specifies all of the loan facilities that are secured by its registered first mortgage, together with the current amounts outstanding. If it turns out that Mr Amirbeaggi's liability to the NAB is a single, ordinary housing loan, then the provision of the security by means of the proposed registered second mortgage may be viable. If there are other facilities secured by the first mortgage, the outcome will depend upon the circumstances, but it is likely that the provision of the second mortgage will be inadequate. If the NAB declines to provide the letter, the Court should reject the provision of the security by means of the second mortgage, because the Court could not be confident of the value of the security. 2. Assuming that there are no presently unknown facilities cross-collateralised against the first mortgage granted to the NAB, it will be necessary for Mr Amirbeaggi to undertake both to the Court and Mr Nicols that he will not in the future engage in any transaction with the NAB or take any other action by which the liability secured by the first mortgage over the Woollahra property is increased to an amount greater than $2.2 million. Mr Amirbeaggi should be allowed $200,000 leeway. That is the only means that I can envisage that will provide an adequate level of confidence that the security of the proposed second mortgage will not be diminished because the amount secured by the first mortgage grows to cover a larger indebtedness or new facilities. 3. Mr Amirbeaggi must covenant with Mr Nicols to provide him on a regular basis (say, monthly) with an NAB issued statement that stipulates the amount currently outstanding that is secured by the first mortgage. Mr Nicols must be able to monitor reliably the retention of the equity that is subject to the second mortgage in his favour. Mr Amirbeaggi should be given some leeway (say, the amount of the debt should not increase above $2.2 million as stated above), but if it does so increase, Mr Nicols must be entitled to demand that Financial pay the amount of the security for costs into court within 30 days, and in default, Mr Nicols must be entitled to exercise his power of sale under the second mortgage. I will say more about the circumstances in which Mr Nicols should be entitled to exercise his power of sale below. 1. I will now turn to deal with the significant differences between Mr Nicols and Financial concerning the terms of the proposed second mortgage. As the parties have proposed entirely different drafts, it is not feasible for the Court to deal specifically in writing with every difference. There are a number of terms for which the parties are in agreement in principle, although the terms have been proposed in different wording. I will not address the terms that I understand are agreed in principle between the parties. As to the terms where the parties differ, the Court cannot be expected to draft the terms of an appropriate second mortgage in their entirety. As I generally prefer the approach to the wording of the proposed second mortgage offered by Financial, I will require Financial to submit to Mr Nicols a new draft of its proposed second mortgage that reflects the conclusions stated in these reasons. Mr Nicols may then suggest amendments to Financial's draft in revision mode, and provide the amended draft to Financial and my Associate. Financial should then advise my Associate of the extent to which it agrees with any suggested revisions and should explain its reasons for any disagreement. I will then decide what terms should be included in the second mortgage. This approach assumes that Mr Amirbeaggi is prepared to give the undertaking stipulated above, and that Financial decides, having regard to these reasons, that it continues to prefer to provide the necessary security for Mr Nicols' costs by means of the second mortgage. 2. The first point to be dealt with is that clause 1 of Mr Nicols' proposed terms contains a personal covenant by Mr Amirbeaggi to pay the amount of any costs that the Court orders Financial to pay to Mr Nicols in these proceedings that is not paid by Financial. Mr Nicols' proposed terms also contain a significant number of personal covenants by Mr Amirbeaggi relevant to the protection of the mortgage. Financial's proposed clause 1 is in the form of a third party mortgage with no personal liability on Mr Amirbeaggi's part. 3. In the course of the communications between the parties concerning the appropriate terms of the mortgage, it was suggested on behalf of Mr Nicols that it was necessary for Mr Amirbeaggi to make a personal covenant to pay Financial's liability for costs, because otherwise there would be no debt to which the second mortgage in favour of Mr Nicols could attach. That is not correct. In principle, there is no reason why Mr Amirbeaggi cannot grant a valid third-party mortgage to secure the payment to Mr Nicols of a liability owed by Financial. Furthermore, as I have observed above, before the hearing of the notice of motion Mr Amirbeaggi made an offer to give an undertaking to the Court to be personally liable to pay any costs not paid by Financial to Mr Nicols, and Mr Nicols rejected that offer. In the circumstances, it would not now be appropriate for the Court to impose direct personal liability on Mr Amirbeaggi. The Court has already found that Mr Amirbeaggi will provide sufficient security for the assistance of Financial, by making his equity in the Woollahra property available to secure any failure by Financial to pay any amount of costs that become due to Mr Nicols. 4. Secondly, clause 2(c) proposed by Mr Nicols would entitle him to sue Mr Amirbeaggi and to enforce the second mortgage, without first giving Financial a notice and making a request for Financial to pay the amount of costs payable to Mr Nicols. Clause 2(d) proposed by Financial would require Mr Nicols first to demand that Financial pay to him the amount of the costs owed, and Mr Nicols would only be entitled to enforce the second mortgage if Financial did not make payment within 30 days. 5. This difference is resolved in part by my ruling that Mr Amirbeaggi will not be required to make a personal covenant to pay Financial's costs liability to Mr Nicols. Further, Mr Nicols should not be entitled to enforce the second mortgage against Mr Amirbeaggi until 30 days after a demand to pay his costs has been served on Financial and not satisfied. Financial should be given the 30 days to pay provided by Financial's proposed clause 2(d), rather than the 21 days suggested by Mr Nicols' proposed clause 2(b). 6. As a general matter, the orders made by the Court should give Financial a right to require Mr Nicols to discharge the second mortgage at any time following payment into court of the $430,000, or the provision of alternative conventional liquid security. 7. Thirdly, Mr Nicols' proposed clause 3 would have the effect that the second mortgage would secure interest at the rate prescribed for unpaid judgments under s 101 of the Civil Procedure Act 2005 (NSW) on any amount of costs unpaid by Financial, even if the total amount secured exceeded $430,000. That term was not sought at the original hearing and is inconsistent with the principal judgment. 8. Fourthly, the circumstances in which Mr Nicols would be entitled to exercise his power of sale on default by Financial substantially differ as between the terms proposed by each of the parties. Clauses 10 and 11 proposed by Mr Nicols would entitle Mr Nicols to exercise his power of sale following any default in payment by Financial, default in performance of any of the covenants, warranties, representations or undertakings in the second mortgage, any default under the loan facility with the NAB, the death or incapacity of Mr Amirbeaggi or his bankruptcy, the insolvency of Financial, a failure to pay $430,000 into court following the sale of the Woollahra property under the first mortgage, and any material adverse change in the security offered by the second mortgage in the opinion of Mr Nicols. In contrast, clause 2 proposed by Financial would limit Mr Nicols' right to exercise his power of sale to the circumstances where the amount of the costs ordered to be paid by Financial to Mr Nicols has finally been determined, and Financial has not paid within 30 days of service of a written demand, the amount of $430,000 not having been previously paid to Mr Nicols. 9. The ambit of the difference between the parties on this issue would be increased if the Court required that the second mortgage include all of the representations and warranties, undertakings and covenants contained in clauses 6 to 8 of Mr Nicols' proposed terms for the second mortgage. I will consider this issue below. 10. The issue is whether the terms of the second mortgage should permit Mr Nicols to exercise his power of sale in circumstances other than Financial's failure to pay up to $430,000 of the costs that may finally be ordered by the Court against Financial. 11. In order for the second mortgage to be an effective form of security for Mr Nicols' costs, it must also provide that he is entitled to exercise his power of sale if the amount of Mr Amirbeaggi's debt to the NAB exceeds, say, $2.2 million, or it comes to Mr Nicols' attention that there are other financial facilities that are cross-collateralised to the first mortgage, or Financial fails to provide to Mr Nicols current evidence of the amount secured by the first mortgage. 12. Given that Mr Nicols and Financial are already engaged in substantial contentious litigation, it would not be prudent for the Court to give Mr Nicols extensive further grounds to exercise his power of sale under the second mortgage. To do so would likely produce further disputation. In particular, the Court should not require the inclusion of a term in the second mortgage that would give Mr Nicols a right to exercise his power of sale on the basis of his own opinion as to the existence of a material adverse change in the security offered by the second mortgage. 13. Instead of Mr Nicols being given extensive additional rights to exercise his power of sale, and to effectively give him an election to require Financial to substitute liquid security for the second mortgage in circumstances triggered by Mr Nicols own opinion, the orders should include a term that gives Mr Nicols leave to apply to the Court for an order that requires Financial to provide liquid security for his costs in substitution for the second mortgage, if any change occurs that Mr Nicols considers materially affects the security of the second mortgage. 14. Lastly, it is necessary for the Court to decide whether the terms of the second mortgage should include the representations and warranties, undertakings and covenants contained in Mr Nicols' proposed clauses 6 to 8. 15. Proposed clause 6 contains representations and warranties that might commonly be required by commercial lenders to be given by proposed borrowers. Clause 6 is not necessary. The value of the Woollahra property has been established by the evidence. The amount of the debt to the NAB will be proved by a document issued by the NAB. The second mortgage will not be able to be registered without the prior consent of the NAB. Once the second mortgage is registered, it will be enforceable by Mr Nicols, irrespective of whether Mr Amirbeaggi holds the property on trust. It will not matter if the execution of the second mortgage by Mr Amirbeaggi causes him to breach any other agreement. It is immaterial whether or not Mr Amirbeaggi has disclosed to Mr Nicols all facts that are material to the risk undertaken by Mr Nicols in accepting the mortgage. Mr Nicols must accept the mortgage because that is the order of the Court. It is obvious that there is a commercial benefit to Mr Amirbeaggi in giving the second mortgage, as he is the principal of Financial. 16. Clause 7 proposed by Mr Nicols contains six obligations on Mr Amirbeaggi that are relevant to the preservation of the Woollahra property and compliance with the terms of other agreements binding on Mr Amirbeaggi. 17. I consider that Mr Amirbeaggi should only be required to covenant to perform his covenants under the first mortgage to the NAB, and to maintain insurance and to keep the Woollahra property in a good state of repair and in good working order, as provided in proposed clause 7(b) and (c). 18. Clause 8 proposed by Mr Nicols contains a number of covenants directed at limiting the amount secured by the first mortgage granted to the NAB, and at matters that might adversely affect the second mortgage to be granted to Mr Nicols. I accept that there must be a regime that prevents the amount secured by the first mortgage increasing beyond, say, $2.2 million. That should be achieved in the way that I have already discussed above. I do not think that the other parts of proposed clause 8 are necessary, having regard to the nature of the Woollahra property, and the protection that will be accorded to Mr Nicols by the registration of the second mortgage. In any event, Mr Amirbeaggi will find it more than difficult to call up any of his uncalled capital, given that he is not a corporation, which would be the subject of the prohibition in clause 8(h). 19. The Court finds itself in the position that it must rely upon the good sense of the parties, restrained by their legal representatives exercising their duties to the Court, to promptly agree the terms of the second mortgage having regard to the observations made in these reasons. ********** 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: 03 August 2023