Supreme Court New South Wales Medium Neutral Citation: Byrne Lewis Group Pty Limited v Australia and New Zealand Banking Group Ltd [2014] NSWSC 172 Hearing dates: 28 February 2014 Decision date: 23 May 2014 Jurisdiction: Common Law Before: Davies J Decision: The parties should bring in short minutes. Catchwords: COSTS - security for costs - Bank commences two sets of proceedings against individuals seeking possession of land - proceedings defended by cross-claims - cross-claims rely on dealings between Bank and a company owned by one of the defendants - claim subsequently made by company against bank - company impecunious - commonality of issues amongst all proceedings - separate damages issues relating to the company - whether security should be ordered Legislation Cited: Australian Securities and Investment Commission Act 2001 (Cth) Contracts Review Act 1980 (NSW) Corporations Act 2001 (Cth) Trade Practices Act 1974 (Cth) Uniform Civil Procedure Rules Cases Cited: Brundza v Robbie & Co (No 2) (1952) 88 CLR 171 Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979) 4 ACLR 492 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 Category: Interlocutory applications Parties: Byrne Lewis Group Pty Limited (Plaintiff) Australia and New Zealand Banking Group Ltd (Defendant) Representation: Counsel: Plaintiff (S Bogan) Defendant (R Bellamy) Solicitors: Woods & Day (Plaintiff) Gadens Lawyers (Defendant) File Number(s): 2013/310215 Judgment 1The Defendant, the ANZ Banking Group Ltd, seeks security for costs in respect of proceedings commenced by the Plaintiff. A little background to the proceedings is necessary. The loans 2The Plaintiff is a building and construction company. It had two shareholders and directors, Edward Byrne and Jim Lewis. 3On 23 May 2007 Byrne Lewis Group Pty Ltd (the Company) entered into a facility with the Bank in respect of a development and construction of five prestige apartments in North Steyne, Manly. 4Apparently in conjunction with this facility Mr Byrne entered into a loan agreement with the Bank on 6 November 2007 to borrow $1,050,000 with security over 157A Seaforth Crescent, Seaforth. The Seaforth property was already part of the security for the Company's loan agreement with the Bank. 5It appears to have been part of the agreement between the Company and the Bank that the Bank would pay periodical claims in respect of the building contract on the North Steyne property. A difficulty seems to have arisen on 15 September 2008 when claim 25 was due for payment by the Bank. It appears that the Company's overdraft had moved beyond its limits. Some related companies may also have been outside their account limits. 6Mr Byrne alleges that Tony Robins, the bank officer with whom he was dealing, said to him on 17 September 2008 that Mr Byrne should organise extra security or funds to bring the overdraft of the Company (and perhaps the overdrafts of the related companies) within approved limits and he (Mr Robins) would pay the claim. 7Mr Byrne said that he took steps to deal with the matter which involved using a property at 29 Wentworth Road, Vaucluse by a company called Tidepass Pty Ltd, to provide $450,000 to bring the overdraft position into line. Mr Byrne said in his affidavit that by 14 October 2008 the overdraft had been brought within limits. Nevertheless, the progress claim number 25 was not paid and nor were claims 26 due on 21 October 2008 and 27 due on 21 November 2008. 8These three claims were paid by the ANZ on 29 December 2008. However, by that time the Company was in difficulty. There were difficulties with paying suppliers and a number of the contractors left the site. The project was delayed in excess of nine months. Since the Company did not have an income Mr Byrne's sole source of income ceased. 9On 13 October 2008 Mr Byrne and his wife Alexandra entered into a loan agreement to borrow $750,000 with security being given over a property they owned at 865 Broken Head Road, Broken Head. Mr Byrne said that the proceeds of this loan were to be used at the discretion of him and his wife including for making personal interest payments and for use in his wife's jewellery business. It seems, and again this is not clear, that some or all of the loan amount went to reduce the overdraft of the Company. Exactly, how this relates to the money coming from Tidepass for the same purpose was not made clear in the evidence. The proceedings 10On 25 June 2012 the Bank commenced proceedings against Mr Byrne seeking possession of the Seaforth property and claiming a little over $1.2 million alleged to be owing under the loan agreement (the Seaforth proceedings). The Statement of Claim did not make clear when default first occurred. Rather, it simply asserted that by 14 May 2012 repayments of $170,792.31 were outstanding. 11Mr Byrne, acting for himself, filed a Defence on 30 July 2012. The repetitious pleading asserted that the bank misappropriated loan funds of the Defendant so that the Defendant was deprived of being able to make repayments due to the Bank. 12On 10 July 2012 the Bank commenced proceedings against Mr and Mrs Byrne claiming possession of the Broken Head property and seeking judgment for an amount a little over $850,000 (the Broken Head proceedings). Mr Byrne, acting for himself and Mrs Byrne, filed a Defence on 30 July 2012. It was in similar terms to the Defence filed in the Seaforth proceedings. 13Shortly afterwards, on 2 August 2012, Mr and Mrs Byrne lodged a complaint with the Financial Ombudsman Service (FOS). Before the complaint was finalised Mr and Mrs Byrne commenced proceedings number NSD2216/2012 on 20 December 2012 in the Federal Court of Australia against the Bank. The documents filed were an application, a Statement of Claim and an affidavit of Mr Byrne sworn 20 December 2012. The claim made arose from the same, or very similar, facts as those which formed the basis of the Defences in the Seaforth proceedings and the Broken Head proceedings. 14On 19 March 2013, on the Bank's application, Robertson J in the Federal Court transferred those proceedings to this Court. 15On 2 July 2013 FOS determined that it had no jurisdiction to deal with complaint. The matters then came before me for judicial directions. By this time Mr and Mrs Byrne had solicitors acting for them. They were given leave to file further defences to both claims and cross-claims. 16Mr Byrne filed a Defence on 10 September 2013 in the Seaforth proceedings. That Defence in substance denied that he was in default and relied on what appeared in a cross-claim filed in the Broken Head proceedings. 17Somewhat unusually, Mr and Mrs Byrne defended the claim in the Broken Head proceedings by denying that they were in default and relying on the cross-claim that had been filed in the Seaforth proceedings. 18The cross-claim that Mr and Mrs Byrne filed, and upon which Mr Byrne relies in defence to his claim in the Seaforth proceedings, seeks declarations that the loan agreement and mortgage in relation to the Broken Head property are unjust and unconscionable, declarations that the Bank has breached the loan contract and has been negligent, and makes a claim for damages under the Australian Securities and Investment Commission Act 2001 (Cth), the Contracts Review Act 1980 (NSW), the Trade Practices Act 1974 (Cth) and under the general law for misleading and deceptive conduct, breach of contract and negligence. 19The damages claim was quantified at $1,498,151.00 made up as follows: 1. Loss of project management fees 2009-2011: $600,000 2. Broken Head loan - principal: $750,000 3. Broken Head loan - interest: $60,151 4. Second mortgage on Broken Head - interest & fees: $68,000 5. Sale of new car at loss: $20,000 20The losses were said to flow from breaches by the Bank that were variously categorised of breaches of fiduciary duty, negligence, breach of contract and misleading and deceptive conduct. The acts complained of on the Bank's part were that the Bank paid the funds obtained under the Broken Head loan agreement other than in accordance with the directions of Mr and Mrs Byrne. The monies were paid by the Bank into the account of the Byrne Lewis Group. According to the cross-claim those payments were made following the alleged failure of the Bank to pay claims 25, 26 and 27 in breach of the arrangement between the Bank, Mr Byrne and the company. 21Similar claims are made in the cross-claim (called the "Second Cross-Claim") and filed by Mr Byrne in the Seaforth proceedings. He similarly seeks declarations concerning unconscionability and the unjustness of the contract and mortgage, and seeks damages under the ASIC Act, the Trade Practices Act and the general law. 22In the Second Cross-Claim Mr Byrne claims damages totalling $1,191,424.00 made up as follows: 1. Loss of project management fees 2009-2011: $600,000 2. Loss of proceeds from Seaforth loan used to fund the project: $430,000. 3. Second mortgage on Broken Head - interest & fees: $68,000 4. Interest paid on Seaforth loan since October 2008: $93,424 23There was also a claim for an unspecified amount of interest said to have been paid on the Seaforth loan of $430,000 up until October 2008. 24It can be immediately seen that there is a doubling up in the two cross-claims in respect of the damages claimed in relation to the project management fees and in relation to the second mortgage on Broken Head. 25The basis of the Second Cross-Claim is similar, in substance, to the basis of the claim in the Broken Head proceedings. It is said that by the Bank failing to pay claims 25, 26 and 27 until 29 December 2008 the company suffered loss and damage by being unable to continue with the project as planned, in failing to be able to pay contractors and suppliers, and by not being able to sell the completed apartments as expected. 26The Second Cross-Claim pleads that the Company suffered loss and damage to the extent of $6,162,000.00 made up as follows: 1. Reduced sale value of properties: $4,340,000 2. Additional construction costs; $540,000 3. Additional marketing costs: $50,000 4. Interest: $880,000 5. Line fees: $352,000 27It is not particularly easy to discern why the precise loss and damage sustained by the Company is relevant since the Second Cross-Claim is brought only by Mr Byrne. Certainly, the general connection between the company's losses and the losses alleged by Mr Byrne is that Mr Byrne's management fees were not able to be paid by the company and his investment of $430,000 from the Seaforth loan into the project was said to be lost. However, no attempt has been made to strike out the paragraphs dealing with the Company's losses. 28The Company commenced proceedings against the Bank on 15 October 2013. The relief sought included declarations of unconscionability and misleading and deceptive conduct under the ASIC Act, the Trade Practices Act and the general law as well as a claim for damages under those Acts and the general law quantified at $6,162,000. 29The Company's claim was again based on the failure of the Bank to pay claims numbered 25, 26 and 27 until December 2008. The misrepresentations were said to have been made to Mr and Mrs Byrne and the company in September 2008. It is alleged that Mr Robins of the Bank said that when the excess position on the company accounts was cleared the progress claim (number 25) then outstanding would be paid. It is further alleged that in about October 2008 the Bank disbursed the funds from the Broken Head loan agreement by paying them into the company accounts bringing those account overdrafts within limits. Despite that disbursement, claim number 25 was not paid and nor were claims numbers 26 and 27 until 29 December 2008. The claim for unconscionability was based upon the same facts. 30There was a further claim based on negligence by reason of Mr Robins stating that the cost to complete the construction works was $916,000 whereas available bank funding for completion was $763,000 leaving a shortfall of $153,000. That conclusion was said to be without any reasonable basis. It was that conclusion that led Mr Robins to refuse to pay claims 25-27 until December. 31Significantly, of the particulars of loss and damage set out in paragraph 57 of the Company's claim, 13 of the particulars were identical with the particulars of loss and damage to the Company set out in paragraph 47 of the cross-claim brought by Mr and Mrs Byrne in the Broken Head proceedings. The additional four particulars in the company's claim were similar to, or a different way of expressing, the same matters that appear in paragraph 47 of Mr and Mrs Byrne's cross-claim. The financial position of the Company 32The evidence discloses that the Company has issued only two shares, one to Mr Byrne and one to Mr Lewis. The ASIC search shows the Company's status as "Strike off action in progress". One of the shareholders, Mr Lewis, was bankrupted on 2 August 2013 and remains an undischarged bankrupt. Since 19 August 2013 Mr Byrne has been the only director of the Company. 33The Company is indebted to the Bank under its loan agreement for a little over $910,000. 34On 23 October 2013 the solicitors for the Bank wrote requesting information from the Company that might tend to show a capacity to meet any adverse costs order. Such documents included financial records including balance sheets and profit and loss statement, tax returns and business activity statements. No documents have been produced by the Company in response to that letter. 35The solicitor for the Company claims not to have received the letter of 23 October 2013 although there was evidence that it had been emailed to them at an email address successfully used previously, and there had been no bounce back of the email that sent it. 36I do not consider that anything turns on the fact that the Company's solicitors may not have received that letter. First, it would be expected, in the ordinary course, that if a security for costs application was brought that the Company would produce whatever documents it had if it intended to show that it had the wherewithal to meet the costs order. A failure to do so could justifiably lead to an inference that no such material was available. Secondly, the Company attempted to rely on an affidavit sworn and apparently served only on the evening before the application was heard. That affidavit annexed some financial documents. Ultimately, when objection was taken to its late service by the Bank, counsel for the Company elected to proceed without reading that affidavit. Thirdly, the Company does not contest, in any event, the assertion that it does not have the funds to meet a costs order. 37There is in evidence a letter from the former director and shareholder Mr Lewis to the Company's solicitors dated 3 October 2013. In that letter Mr Lewis asserts having made loans to the Company and the letter required repayment of those loans as follows: (a) Loan to Byrne Lewis Group Pty Ltd and Mr Byrne of $2,848,500; (b) Loan to Byrne Lewis Group Pty Ltd and Mr Byrne of $1,347,000; (c) Loan to Byrne Lewis Group Pty Ltd and Mr Byrne of $1,892,352. 38The letter did not detail when and in what circumstances these loans were made. 39The Company does not dispute that it does not have the funds to meet an order for security for costs. The Company says that it is unable to meet such an order by reason of the conduct of the Bank of which it complains in the proceedings. It says that any order for security for costs would have the effect of stultifying the Company's claim. 40Although the Company wished to assert that an order for security would stultify its claim, particularly in circumstances where its financial position had been brought about by the Bank, I ruled that the evidence the Company wished to rely on in that regard (specifically, conclusionary evidence from Mr Byrne as the Company's sole shareholder, director and guarantor), was inadmissible. Common issues 41The principal matter argued on the application concerned the identity or otherwise of the defences and cross-claims in the possession proceedings with the claims made by the Company in its proceedings. 42The Bank submitted that there was a bright line distinction between the possession proceedings and the Company's proceedings. In particular, even if it was accepted that there was a prima facie case demonstrated of misleading and deceptive conduct (such was not conceded) there were issues of causation of loss and, most certainly, the issue of damages which did not arise in the two sets of possession proceedings. 43The Bank accepts that there is some commonality of facts and issues pleaded in the possession proceedings and in the Company's proceedings. Those facts and issues are said to include: (a) the misrepresentations alleged to have been made by ANZ with respect to the Company's facilities; (b) the allegations regarding breaches by the Bank of what are said to be terms of the Company's facilities to pay progress claims promptly, to cooperate with the Company and to act with reasonable care and skill relating to the Bank's assessment of the costs of completing the North Steyne development. 44In my opinion, that understates the extent of the commonality between the proceedings. 45Counsel for the Company, in his detailed written submissions, has prepared a chart setting out the comparability of allegations made in the two cross-claims brought in the Seaforth proceedings and the Broken Head proceedings on the one hand with the claims in the Company's Statement of Claim on the other. I accept the analysis contained in that comparison chart. Counsel has then clearly set out in paragraphs 45-47 of his written submissions matters that are peculiar to the Company's proceedings. In substance these are said to be the reliance that the Company placed on the Bank's representations, compared to the reliance of Mr and Mrs Byrne, and that the Company's loss and damage included matters such as good will, reputational damage to business and lost opportunity to engage in other projects that do not form part of the claim by Mr Byrne or by Mr and Mrs Byrne. 46In my opinion, the damages issue in relation to the Company is likely to extend beyond the matters identified by counsel for the Company. Issues of causation of loss are, as counsel for the Bank has indicated, likely to loom large in relation to the Company's claim. Certainly, the state of the Company's finances at the time the progress payments were due to be made will be a relevant matter. However, that is not unrelated to the claim that Mr Byrne makes that he was unable to obtain payment of his fees from the Company at the relevant time. The cause of his inability to be paid is likely to be bound up with the reasons the Company was not able to pay those fees. That in turn concerns the issue of causation and whether that loss flowed from any breaches on the Bank's part. 47The Bank submitted also that expert evidence that would need to be obtained by the Bank would only be needed to meet the claim of the Company. The expert evidence was said to relate to the financial position of the Company and whether it was able to continue with the projects regardless of the acts and omissions of the Bank in relation to the payment of the claims. In other words, the expert evidence would deal with the issue of causation of loss whether in relation to the alleged misrepresentations of the Bank officers or of the Bank's acts or omissions in relation to the payment of the claims. 48The Company accepts that Mr and Mrs Byrne will not need to prove the exact figure of the Company's losses in order to make good their cross-claims. However, it was submitted that it would still be necessary to prove that the damage to the Company is of a significant order so that the causation issue can be established, namely, that the Bank's failure to make the payments caused the Company not to be able to pay management fees and otherwise meet its liabilities. 49It is instructive to look at the particularisation of the Company's loss set out in paragraph 48 of the Second Cross-Claim and referred to at [26] above. The first item (reduced sale value of properties) would not be a relevant head of damage for Mr and Mrs Byrne to establish to make out their cross-claims because that loss is likely to be a loss suffered after the relevant time from September to December 2008. Some but not all of the other heads of damage might be thought to be relevant, and would need to be established by Mr and Mrs Byrne to make out their causation case. The decision 50The discretion conferred by r 42.21 UCPR and s 1335 of the Corporations Act 2001 (Cth) is a wide and unfettered one. Rule 42.21(1A) now lists a number of matters that the Court may consider along with such other matters as the Court considers relevant. One of those considerations is: (e) whether the plaintiff is effectively in the position of a defendant. 51It cannot be said that the Company is in the position of a defendant. However, cases discussing that principle have some relevance by analogy because the claim that the Company makes is, for the large part, the same claim that Mr and Mrs Byrne make in each of the possession proceedings as a defence to those proceedings. So, for example, in Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979) 4 ACLR 492 a company in liquidation that brought proceedings for declarations and injunctions arising out of the appointment of receivers by the Defendant (the creditor) was held to be in the position of the Defendant and was not required to provide security for costs. 52In my opinion, the proper approach in the present matter is to ask what costs will be incurred by the Plaintiff in meeting the claim by the Company that would not be incurred in bringing the possession proceedings and responding to the cross-claims made by Mr and Mrs Byrne in both of those proceedings. 53It seems to me that most of the issues concerning liability and causation (duties that the Bank owed, representations made, whether the Bank's conduct was unconscionable, the reliance of both the Company as well as Mr and Mrs Byrne, the Company's financial position generally) arise out of the possession proceedings and the defence of them. In addition, loss and damage sustained by the Company from September 2008 to February 2009 forms part of the cross-claims by Mr and Mrs Byrne as in the claim by the Company. 54To the extent that expert evidence is relied upon for any of these matters, such evidence would have been necessary for the Bank to defend the cross-claims of Mr and Mrs Byrne. 55There should be no order for security made in respect of these matters. 56It must then be determined if security should be ordered for the discrete matters in the Company's claim. Those matters chiefly concern the full extent of losses of the Company. 57Three matters for consideration in r 42.21(1A) are relevant: (c) the impecuniosity of the plaintiff, (d) whether the plaintiff's impecuniosity is attributable to the defendant's conduct, (f) whether an order for security would stifle the proceedings. 58In conjunction with those, consideration should also be given to whether there is any person standing behind the Company who could reasonably be expected to make funds available to satisfy an order for security. In KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 198. Beazley J (as her Honour then was) said that a consideration in relation to stultification was this: Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security: see Memetu Pty Ltd v Lissenden (1983) 8 ACLR 364; Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201; Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; Hession v Century 21 South Pacific Ltd (In liq) (1992) 28 NSWLR 120 at 123; Bryan E Fencott at 513; Yandil Holdings at 545. The combined effect of these two principles was summarised by Meagher JA in Hession at 123 as follows: ... a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors) ... Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs. 59The Company is impecunious. The evidence does not allow me to say if the impecuniosity was caused by the Bank. That is only an allegation. I do not consider, in view of my earlier determination, that the Company's claim will be stultified if I was to order security for that part of the Company's claim that is separate from the defences and claims of Mr and Mrs Byrne. 60In any event, the evidence about Mr Byrne's financial postion is entirely unsatisfactory. Further, given what I perceive as the inextricable link between the Company's proceedings and the claims made by Mr and Mrs Byrne, I consider that Mrs Byrne is a relevant person in relation to those who stand behind the Company. I accept that she is not a shareholder or director. However, her success in the Broken Head proceedings is closely tied to the Company's success in its proceedings. There is no evidence of her financial position. 61Accordingly, I consider that an order should be made for security for that part of the Company's claim that is separate from the defences and claims of Mr and Mrs Byrne. 62In his affidavit in support of the Motion Mr Campbell Hudson has set out in some detail the work that his firm expects to carry out to defend the Company's proceedings. He has broken down the work into estimated hours which he has costed. I accept that Mr Hudson is well qualified to give that evidence. However, my review of Mr Hudson's assessment leaves me with the clear impression that these are the costs likely to be incurred for all of the three sets of proceedings because of the commonality of issues that I have identified. 63The Bank accepts that, in the ordinary course, all three cases will be heard together. It is my intention so to order. The ordinary course assumes that any security ordered will be paid. If it is not paid in a timely manner it may be necessary to separate the Company's claim with the inevitable result that costs will increase and more security is likely to be ordered. 64By reason of the determination I have made about the commonality of issues, it seems to me that two matters follow. First, security should not be provided until preparation has reached the point where evidence concerning the Company's losses is ordered to be served. Secondly, any security will be assessed as a proportion of the breakdown provided by Mr Hudson. A broad brush approach is often necessary when ordering security and the need for that is highlighted in the present case. 65I bear in mind that security is not intended to be indemnity for costs and is not designed to meet all eventualities: Brundza v Robbie & Co (No 2) (1952) 88 CLR 171 at 175. 66Mr Hudson assesses the costs of reviewing the Company's lay and expert evidence, preparing the Bank's evidence in response and reviewing the Company's evidence in reply as totalling between $45,160 and $81,260. A few things should be said. First, these are solicitor/client costs. Secondly, they deal with all evidence and not just damages evidence relating only to the Company's case. Thirdly, as noted earlier, most of the expert evidence is likely to be evidence common to all proceedings although there may need to be some expert consideration of the Company's damages not relevant to the other claims. 67In those circumstances I consider that no more than one sixth of these costs could relate to evidence exclusive to the Company's case. Accordingly, I consider that the Company should provide security of $10,000 at the time evidence in relation to damages is required to be served. This amount will also relate to discovery, although I think it is likely that most of the discovery (if it is sought) would be necessary in the Seaforth proceedings and the Broken Head proceedings because of the issues concerning the Company's losses in those proceedings. 68For preparation of the case for final hearing Mr Hudson has estimated costs of between $39,830 and $46,280. Again, I consider one sixth is the appropriate proportion. The Company should provide a further sum of $6,000 security six weeks before the first date of the hearing. 69Mr Hudson has estimated $82,150 for the cost of a 10 day hearing and $70,000 to $80,000 for experts for the hearing. He sets out other costs that relate to subpoenas, correspondence and attendance at directions hearings. These are likely to be incurred in conducting the Seaforth proceedings and the Broken Head proceedings in any event. I consider that the Company should provide a further sum of $15,000 two weeks before the first day of the hearing as security for that part of the hearing which will deal exclusively with the Company's claim. 70The parties should bring in Short Minutes to reflect these reasons. The Short Minutes should deal with costs and further directions for the conduct of the proceedings. My prima facie view on costs is that each party has been partly successful on the Motion and that there should be no order to the intent that each party should bear its own costs of the Motion. ********** 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: 23 May 2014