Supreme Court New South Wales Medium Neutral Citation: Bird In The Hand 2 Pty Ltd v S&K Johnson Construction Pty Ltd [2024] NSWSC 560 Hearing dates: 29 April, 3 May 2024 Date of orders: 3 May 2024 Decision date: 03 May 2024 Jurisdiction: Equity - Real Property List Before: Parker J Decision: See [64] Catchwords: COSTS — security for costs — corporate plaintiff — off the plan development — application by plaintiff for statutory leave to rescind — plaintiff a special purpose vehicle — overall loss projected for development but loan facility funds available to pay legal costs — inability to pay not established — proceedings defensive in nature — application for security refused Legislation Cited: Conveyancing Act 1919 (NSW) Corporations Act 2001 (Cth) Evidence Act 1995 (NSW) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: Aquatown Pty Ltd v Holder Stroud Pty Ltd [1995] FCA 1667 Aurora Networks v Helbedl [2013] FCA 632 Classic Ceramic Importers v Ceramica Antiga SA (1994) 13 ACSR 263 Heller Factors v John Arnold's Surf Shop (1979) 4 ACLR 492 Monto Coal 2 Pty Ltd v Sanrus Pty Ltd [2019] 3 Qd R 143 Oswal v Commissioner of Taxation [2015] FCA 1366 Willey v Synan (1935) 54 CLR 175 Texts Cited: Nil. Category: Procedural rulings Parties: Notice of Motion filed 15 April 2023 S&K Johnson Constructions Pty Limited (First Applicant/First Defendant) Maggie-Rose Melanie Sciascia (Second Applicant/Second Defendant) Dean John Glen-Holmes (Third Applicant/Fourth Defendant) Rebecca Ann Benney (Fourth Applicant/Fifth Defendant) Gregory John Chapman (Fifth Applicant/Sixth Defendant) Daniel Gregory Chapman (Sixth Applicant/Seventh Defendant) Brock Anthony King (Seventh Applicant/Eighth Defendant) Stephen Schulter Schulter (Eighth Applicant/Ninth Defendant) Lynn-Holly Casolocan Ting (Ninth Applicant/Tenth Defendant) Pervin Rajah (Tenth Applicant/Eleventh Defendant) Timothy Malcolm Cole (Eleventh Applicant/Twelfth Defendant) Alison Morag Russell (Twelfth Applicant/Thirteenth Defendant) Clint Mathew (Thirteenth Applicant/Fifteenth Defendant) Shoby Alias (Fourteenth Applicant/Sixteenth Defendant) Bird In The Hand 2 Pty Limited (Respondent/Plaintiff) Representation: Counsel: A Avery-Williams (Applicants) D R Pritchard SC/J J Young (Respondent) Solicitors: Moin & Associates Pty Ltd (Applicants) OMB Solicitors (Respondent) File Number(s): 2023/164680 Publication restriction: Nil JUDGMENT- Ex Tempore Revised from transcript and annotated; issued 14 May 2024 1. This is an application for security for costs in property litigation pending before the Court. The application is made by 14 of the 15 active defendants, who are commonly represented in the proceedings. They seek security from the plaintiff in the sum of $300,000. I will refer to them collectively as the "defendants" in this judgment. 2. The proceedings concern land which is being subdivided into development lots. The plaintiff, Bird In The Hand 2 Pty Limited ("BIH"), owns the land and is undertaking the subdivision. The defendants are off the plan purchasers of lots in the subdivision. Their contracts provide, as is commonly the case, for BIH, as vendor, to be able to rescind if the plan of subdivision is not registered by a sunset date. 3. The development is subject to the statutory regime for off the plan contracts in the Conveyancing Act 1919 ("CA") (Part 4, Div 10; ss 66ZL to 66ZU). The sunset dates under the defendants' contracts have passed. BIH wishes to rescind those contracts, but the defendants will not consent. In the proceedings, BIH seeks the Court's leave to rescind under CA s 66ZS. The defendants resist the grant of leave. Background and procedural history 1. The property which is the subject of the proceedings is a large block of vacant land at Thrumster, which is a suburb of Port Macquarie on the Central Coast of New South Wales. The subdivision is known as "The Sanctuary". It is proceeding in stages. There are eight stages, involving the creation of 236 development lots overall. This litigation concerns lots in stages 1 and 2. The defendants account for 15 of those lots. There are 54 lots in total in the two relevant stages. 2. The contracts for stages 1 and 2, or at least those to which the defendants are party, were exchanged between April and August of 2021. In each case the sunset clause provides a period of 18 months from the date of the contract for the registration of the plan of subdivision. Thus, in the case of the defendants' contracts, the sunset dates were between October 2022 and April last year. 3. The development has been delayed. According to BIH, it became clear by the second half of 2022 that the plan of subdivision for stages 1 and 2 could not be registered by the sunset dates. 4. Between November 2022 and April last year, negotiations took place between BIH and the purchasers of the lots in stages 1 and 2. Those negotiations resulted in agreement being reached with a majority of the lot owners for their contracts to be rescinded or varied. As I have mentioned, the defendants were not prepared to agree to the rescission or variation of their contracts on the terms that were acceptable to the other purchasers. 5. The present proceedings were commenced by BIH on 25 May last year. In November, they were fixed for hearing to begin on 29 May this year. Eight days have been set aside. The hearing has been allocated to me. On 21 March this year, I conducted a pre-trial directions hearing. The matter is ready for hearing, and accordingly, will proceed on those dates. Application for security for costs 1. The defendants' application was made by notice of motion filed on 12 April this year. It had been foreshadowed by a letter dated 26 March. 2. The evidence in support of the application is an affidavit from Mr Gregory Moin, the defendants' solicitor. In his affidavit, Mr Moin extracts some material from the affidavits of Scott Maxwell Pampel which have been filed in support of BIH's case in the principal proceedings. For BIH as respondent, an affidavit was filed and read from Damien Edward Gwynne. He is the sole director of BIH and has carriage of the "day to day business of" its operations. The affidavits of Mr Moin and Mr Gwynne were read and there was no application to cross-examine either of them. 3. The application relies on two sources of power to order security in a case such as the present, where the plaintiff is a company. One is s 1335(1) of the Corporations Act 2001 ("Corporations Act"). That enactment provides: (1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given. 1. The other power is contained in the Rules (Uniform Civil Procedure Rules 2005). The relevant provision is r 42.21 (1), (1)(d), which states: (1) If, in any proceedings, it appears to the court on the application of a defendant— … (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or … the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given. Plaintiff's inability to meet defendant's costs 1. Under both the Corporations Act and the Rules, the Court may not award security for costs unless the defendants first establish that there is "reason to believe" that BIH will be unable to meet their costs if ordered to pay those costs. It is common ground that, if the threshold question is determined in the defendants' favour, inability to meet their costs would also be a factor, and usually a strong factor, in favour of exercising the discretion to make such an award. I therefore deal with that question first. 2. Textually, the threshold question is to be determined by reference to the defendant's "costs", and this apparently means the defendant's costs of the proceedings as a whole. In the present case, Mr Moin's estimate of the costs recoverable by the defendants if they succeed is $300,000. There is a dispute about the reliability of that estimate and also about whether, if the Court were to order security, the full amount of the costs to be incurred by the defendants should be awarded as security. I deal with those issues below. But in the meantime, I address the threshold question on the basis that if the defendants succeed, BIH's costs liability to them will be $300,000. 3. In his affidavit, Mr Moin refers to Mr Pampel's evidence that BIH is a special purpose vehicle established to conduct the subdivision. That means that its sole asset is the land. As Mr Moin recounts, in an affidavit filed in May last year in support of BIH's originating summons, Mr Pampel provided forecasts for the profit BIH was expecting to make from the subdivision project. The forecasts were undertaken on two bases. One, more favourable to BIH, was that rescission of the defendants' contracts was not permitted. The other was that it was. If rescission was permitted, the estimate profit was $4.7 million. If rescission was denied, the estimate profit was $1.2 million. 4. But, in an affidavit filed in February this year, Mr Pampel deposed that the forecasts had been downgraded. According to the forecast at that stage, even if rescission was permitted, BIH would make an overall loss on the project of $7 million. If rescission was not permitted, the loss would be $9 million. 5. A search of the title demonstrates that there are two registered mortgages on the land. The first is in favour of a financier company which, it is agreed, is an independent party. The second mortgage is held by a company named CWMB Pty Limited ("CWMB") which is a related corporation of BIH. 6. In Mr Gwynne's affidavit, he went into the financial structure of the project in more detail. He described the project as a venture being conducted by a "corporation investment structure" named Certainty Wealth Group. According to Mr Gwynne, the group has raised money for the project from private investors. The funds have been used to purchase shares in CWMB (of which Mr Gwynne is the sole director). There is a formal loan agreement between CWMB and BIH. The facility limit is $50 million. It is this facility which has been used to fund the works required to undertake the subdivision. 7. Mr Gwynne also described, in more detail, the negotiations between BIH and the purchasers of lots in stages 1 and 2. It is common ground now, and seems to have been clear at the time of the negotiations, that the open market value of the lots on completion of the subdivision would be significantly higher than the prices at which they were originally purchased. The offer made by BIH involved the purchasers increasing the amount payable under their contracts by $59,000. In the defendants' case, this was between 40% and 60% of the now agreed increase in market value of the lots. 8. Of the purchasers, 16 accepted the offer and 25 rescinded. For those who accepted, the varied contracts are due to settle in June (stage 1) and August (stage 2) of this year. This means, I assume, that registration of the strata plan, or strata plans, covering the relevant stages will have occurred by then. 9. According to Mr Gwynne, there remains $11.4 million headroom in BIH's loan facility from CWMB. Mr Gwynne stated in his affidavit that if costs were awarded against BIH in these proceedings, the amount due "could and would" be paid by drawing on the facility. 10. Mr Gwynne also deposed that the estimates of profit had been reconsidered since Mr Pampel's evidence in February. The result has been an upgrade. If rescission of the defendants' contract is permitted, the loss is still projected to be $3.5 million. If there is no rescission, it will be $6.4 million. These figures are based on completion of the project as a whole in 2027. 11. Counsel for the defendants submitted that the evidence in Mr Moin's affidavit presented a clear case that the threshold question for the grant of security was satisfied. BIH's only asset is the land, and, based on Mr Pampel's February estimates, BIH will suffer an overall loss on the subdivision project. On completion of the project and transfer of the properties, it will be insolvent. 12. Counsel submitted that Mr Gwynne's evidence did not ultimately displace this conclusion. Counsel took me to the terms of the loan agreement between BIH and CWMB, for the purpose of demonstrating that if BIH suffered a costs order, it would have no right to draw on the facility to meet that liability. 13. Counsel took two points. First, under the terms of the facility, BIH is only entitled to draw on it to meet costs of undertaking the subdivision. In counsel's submission, a costs order against BIH in these proceedings would not answer that description. Secondly, CWMB has no obligation to provide the funds sought under the facility, if there has been an insolvency event, for the purposes of the agreement. Counsel submitted that on the definition in the agreement, BIH's financial position was such that there had been, or at least could well be, an insolvency event for the purpose of the relevant clause. 14. Counsel also noted that even on Mr Gwynne's updated estimates, a loss was still forecast. Any costs order made against BIH in favour of the defendants would give rise to an unsecured liability, whereas CWMB is a secured creditor. This meant that the defendants would effectively be at CWMB's mercy so far as payment was concerned. 15. It is, I think, clear that, in determining whether a defendant's costs will be met by a plaintiff company if unsuccessful in proceedings, consideration is not confined to the assets actually held by the company. The test is whether, as a practical matter, the company will be able to pay when the time comes. [1] Trading profits which may be made, or funds which may become available from the sale of assets or from borrowings, may be taken into account. I did not, in the end, understand counsel for the defendants to dispute this. 16. I am prepared to accept that if a costs order is made against BIH, it will not necessarily have a legal right to compel CWMB to advance the necessary funds. But I think I need to consider, as a practical matter, whether those funds are likely to be forthcoming whether there is a legal obligation to provide them or not. 17. The practical reality, as it appears, is that the continuation of the project is essentially under the control of the investors who have funded it through CWMB. I do not know the precise terms on which moneys have been invested and lent but I think that I can infer that the project will not necessarily cease and CWMB will not necessarily stop providing financial support simply because there is, at the end, a shortfall. The calculation of the shortfall presumably includes the interest charged by CWMB to BIH, and that may be more than the market rate. It may be worthwhile for the investors to complete the project, even if they do not recover the full amount of the interest returned. 18. Furthermore, premature termination of the project would seem likely to increase the shortfall. Presumably, that is why work on the project is continuing even though there is a shortfall ultimately predicted. If this is so, then it is not unless the projected shortfall grows so large as to make it better for the investors to cut their losses, that CWMB might not continue to fund the necessary costs to complete the project. 19. The hypothesis that I am asked to consider is that the defendants succeed in the proceedings and obtain an order for costs in their favour. Given that the trial is to take place later this month, the making of any costs order in the defendants' favour can be expected within, at most, a few months after that, and in any event, well before the end of the year. That is still more than two years before the project is scheduled to be completed. 20. Counsel for the defendants suggested that there was a potential for the defendants to be stalled as a result of the assessment process. But I consider that the risks of that happening are small. It may even be that that circumstances would justify an application for a lump sum costs order. In any event, it seems to me that the sum payable is likely to be crystallised well before the completion of the project. 21. There is of course always a risk that the investors will "pull the plug" on the project. The test at the threshold level is set not to be a demanding one. But the test, nevertheless, is expressed in terms of whether, if unsuccessful, the plaintiff "will be" unable to meet the defendants' costs, not whether there is a risk of the plaintiff not being able to do so. The amount that has already been committed to the project dwarfs the assumed costs liability of $300,000. I do not think that the risk is sufficiently large to justify the conclusion that there are reasons to believe that BIH, if unsuccessful, "will not" pay the relevant costs. 22. For this reason, I do not think that the defendants have satisfied the threshold condition for the exercise of the Court's power to award security. The application fails for that reason. Discretionary factors 1. In case I am wrong, I will go on and consider the discretionary factors which were argued. There were three of them. 2. The first discretionary factor was the merits of the case brought by the plaintiffs. Both counsel addressed this issue. 3. Counsel for the defendants submitted that BIH was unlikely to succeed in establishing that it would be just and equitable to permit rescission of the defendants' contracts. But, as well, counsel emphasised that, under CA s 66ZS(8), even if BIH did obtain leave to rescind, BIH would be liable to pay the defendants' costs of the proceedings unless BIH could satisfy the Court that the withholding of consent to rescission had been unreasonable. Counsel submitted that the likelihood of that condition being satisfied was small. 4. Counsel for BIH presented a diametrically opposed submission. They contended that on the evidence, there was a strong case for leave to rescind and a strong case that the defendants had behaved unreasonably. Counsel emphasised the offers that had been made to the purchasers and had been rejected by the defendants. Those offers, counsel submitted, allowed for the purchasers to receive a fair and reasonable share of the increased value of their lots. 5. I am not sure how the submissions by counsel for the defendants, and the reference to s 66ZS(8), assists their case on this application. The Court is already obliged to approach the application on the assumption that the defendants will receive a costs order in their favour. 6. By the same token, in an application of this sort, it is only rarely that the court will go into the merits of the plaintiff's claim. It may be that if the plaintiff can establish that there is an overwhelming likelihood of success, then, perhaps in combination with other factors, the court may be persuaded to refuse security. But such cases are likely to be rare. 7. I do not think that this is one of them. I certainly am not prepared, based on the evidence and submissions that I have heard, to offer any forecast as to the parties' respective likelihood of success in the proceedings, and still less as to the likely incidence of costs. In the end, I think neither party derives any support from the debate about the merits of the case. 8. The second factor is delay. The application was not foreshadowed until more than eight months after the proceedings had been commenced. 9. Counsel for the defendants submitted that it had been reasonable not to bring the application until Mr Pampel's updated affidavit of February which indicated the project would result in a loss. But even so, the affidavit was filed in February and the point was not mentioned at the pre-trial directions hearing before me on 21 March. On any view, there has been a delay in bringing this application, and that is a factor which militates against granting it. 10. The third and most important factor is whether BIH has brought the proceedings defensively. That may become a factor to be considered in two possible ways. One is that the power to award costs depends upon the person bringing the proceedings being a "plaintiff". In some cases, it may be argued that the moving party in litigation does not meet that description. But even where the moving party does meet that description, it is an established discretionary ground for refusing the application that the proceedings are, in substance, defensive. 11. Counsel for BIH contended that the present proceedings were indeed brought in substance, if not in form, defensively. Counsel relied, in particular, on authorities concerning the award of security for costs in proceedings brought to set aside a creditors statutory demand as a prelude to liquidation proceedings. 12. The authorities to which counsel referred began with the judgment of Sundberg J in Aquatown Pty Ltd v Holder Stroud Pty Ltd [1995] FCA 1667. Aquatown and the cases that follow it establish that, generally speaking, proceedings which are brought to set aside a statutory demand are in substance defensive. Accordingly, security for costs will not be awarded against the plaintiff in such proceedings. 13. In Aquatown, Sundberg J referred to authorities which suggested that an applicant for an order setting aside a statutory demand is not a "plaintiff" for the purposes of s 1335(1) of the Corporations Act. Later authority, however, seems to be to the contrary and treats the defensive nature of the proceedings as a matter going to discretion. [2] For the purposes of the present application, I will adopt the same approach. 14. Sundberg J, in Aquatown, referred to the earlier decision of the High Court in Willey v Synan (1935) 54 CLR 175. That case concerned proceedings which were commenced by the finder of goods, which had been taken into the possession of the Collector of Customs. The Collector exercised a statutory power to give a notice forfeiting the goods unless proceedings were commenced. The High Court considered that the resulting proceedings against the Collector were defensive in nature. 15. In Willey, the Collector was effectively using the statutory procedure to effect a confiscation of the plaintiff's property, which could only be overcome by the commencement of proceedings. As Sundberg J pointed out in Aquatown, in a case where a plaintiff seeks to set aside a statutory demand, the argument that the proceedings are defensive is not quite as strong. A company facing a statutory demand is not faced with any immediate loss of property, but only with the possibility that winding up proceedings may be brought based on the failure to comply. And those proceedings may still be defended on the ground that the company is not insolvent. But the practical pressure to head off a winding up application has been sufficient for the courts to conclude that the making of an application to set aside the statutory demand is defensive in nature. [3] 16. Another group of cases in which the issue of defensiveness has arisen out of the appointment of receivers by secured creditors. In such cases the courts have seen such an appointment as the exercise of a self-help remedy by the creditor, and have, on that account, treated proceedings aimed at removing the receiver as defensive in nature. [4] 17. Counsel for the defendants acknowledged these authorities but submitted that they did not apply. Counsel emphasised that the scheme of the legislation in the present case was to impose the obligation to justify a rescission on BIH. Counsel noted that no cross-claim had been made, as it sometimes is in proceedings of this kind, for specific performance. Counsel submitted that it would not be open to bring such a cross-claim, especially as the project appeared to be continuing. 18. Counsel submitted that the defendants took no action themselves, comparable to the actions taken by the defendants in the other cases to which I have referred, which might be said to have provoked the litigation. All they did was decline BIH's request to rescind. 19. I think it may be going too far to say that the defendants could not bring specific performance. Although a claim for specific performance is often not made until the time for payment arises, there is no requirement to wait for that to happen. The Court may act quia timet as soon as a sufficient risk is established that the defendant's obligations will not complied with when those obligations fall due. 20. Having said that, it is true that no cross-claim for specific performance has been brought. But I do not think that that takes the defendants very far. Although the relevant CA provisions do not refer to specific performance, they have been enacted against a background where longstanding authority establishes that purchasers under contracts for the sale of land are usually able to obtain that remedy virtually as a matter of right. The supposition clearly is that a party to such a contract who does not accept an offer of rescission will be entitled to enforce it. 21. In my view, that supposition is justified here. In rejecting rescission, the defendants are seeking to hold BIH to its obligation to convey the lots the subject of their contracts to them, once the strata plan has been registered. They are not obliged to have brought an action for specific performance at this stage. But if BIH fails to obtain leave to rescind and then fails to convey the lots, the defendants will clearly be entitled to bring claims for specific performance, and there is every reason to think that they will do so. 22. In these circumstances, I see the proceedings as being, in substance, defensive. BIH's position is no different in principle from the plaintiffs in the statutory demand and receivership cases to which I have referred above. 23. As a matter of discretion, therefore, I would refuse the application, even if contrary to my view, the defendants had met the threshold condition for the award of security. Quantum 1. Finally, I will say something about quantum. Mr Moin presented an estimate of costs in his affidavit which lacked supporting detail. The estimate simply took the form of figures, without any detail of the rates charged by the various lawyers engaged in the proceedings. There was no evidence of what in fact has been charged to this point. 2. It seems to me that an estimate of costs in an application of this kind involves an expression of opinion for the purposes of s 79 of the Evidence Act 1995. Accordingly, an estimate which does not disclose sufficient detail to allow the Court to understand the basis upon which it has been made is, strictly speaking, inadmissible. If admitted, is of diminished weight. 3. There is another difficulty with the estimate. Counsel for the defendants accepted that, in light of the delay in bringing the application, any award of security might be limited to costs to be incurred after the date on which the application was foreshadowed. But Mr Moin's estimate did not allow such future costs to be quantified. 4. Counsel suggested that I could simply award half of Mr Moin's estimate, namely $150,000. But I do not think that that is satisfactory. The court, in an application such as the present, should not and does not descend into great precision in trying to estimate the actual quantum of the costs which will be incurred. Even so, if the point is taken, as it was in this case, the court is not authorised simply to guess about quantum. There must be some legitimate justification for selecting the figure fixed by the Court. 5. Counsel for BIH did concede that there was a certain minimum figure which could safely be awarded on the basis that the costs would not be less than that figure. Counsel's conceded figure was $8,000 a day for the eight days of hearing, or a total of $64,000. Had I awarded security, I would only have awarded security in that amount. Orders 1. For the reasons given, the application fails and will be dismissed. I will hear the parties on the costs of the application. (The parties addressed on costs.) 1. On the motion filed 15 April 2024, the orders of the Court are: 1. Order that the motion be dismissed. 2. Reserve the costs of the motion. ********** Endnotes 1. Monto Coal 2 Pty Ltd v Sanrus Pty Ltd [2019] 3 Qd R 143 at [48]-[52]. 2. Oswal v Commissioner of Taxation [2015] FCA 1366 at [40]-[48]. 3. Classic Ceramic Importers v Ceramica Antiga SA (1994) 13 ACSR 263 at 267; see also Aurora Networks v Helbedl [2013] FCA 632. 4. See for example Heller Factors v John Arnold's Surf Shop (1979) 4 ACLR 492 at 498-499. 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: 14 May 2024