Staway Pty Ltd (In Liquidation) (Receivers and Managers Appointed) v Liberty Financial Pty Ltd (No. 2) [2017] NSWSC 491

Supreme Court New South Wales

Medium Neutral Citation: Staway Pty Ltd (In Liquidation) (Receivers and Managers Appointed) v Liberty Financial Pty Ltd (No. 2) [2017] NSWSC 491 Hearing dates: 7 April 2017 Decision date: 02 May 2017 Jurisdiction: Equity Before: McDougall J Decision: Refer to para [25] of judgment. Catchwords: COSTS – application for further security for costs – where an order for further security would stultify the proceedings – where issues will be litigated in related proceedings regardless – application dismissed Legislation Cited: Civil Procedure Act 2005 (NSW) Corporations Act 2001 (Cth)

Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: In the Matter of Staway Pty Ltd (In Liquidation) (Receivers and Managers Appointed) [2013] NSWSC 819 Category: Procedural and other rulings Parties: Staway Pty Ltd (1st Plaintiff) John Stark (2nd Plaintiff) Liberty Financial Pty Ltd (1st Defendant) Secure Funding Pty Ltd (2nd Defendant) Representation: Counsel: J E Lazarus (Plaintiffs) R M Foreman (Defendants)

Solicitors: C G Gillis & Co (Plaintiffs) Arnold Bloch Leibler (Defendants) File Number(s): 2013/202486

Judgment 1. HIS HONOUR: For some years, the first plaintiff (Staway), in its capacity as trustee of a unit trust, conducted a motor vehicle dealership business. For some years, the defendants (the lenders) provided financial facilities to that business, including by way of what is commonly referred to as a floor plan arrangement. 2. Under the floor plan facility, the lenders acquired motor vehicles that Staway required for the purposes of its business, and bailed those vehicles to Staway so that it could sell them. Staway was required to account to the lenders for the proceeds of all vehicles sold. It is the lenders' case that Staway misapplied in excess of $4 million, proceeds of sale of a large number of motor vehicles, by diverting them to its own uses rather than by paying them to the lenders. It does not appear to be in dispute that this happened, although the amount and details of the misapplication may not be agreed. 3. When the lenders discovered that Staway had misapplied the proceeds of sale of motor vehicles, they appointed receivers and managers. Staway has since gone into liquidation. The effect, it says, is that the value of its business – said to be many millions of dollars – has been destroyed. Staway has commenced these proceedings to recover what it says is the amount of its loss. The lenders, by a cross-claim, seek repayment of what they say is the total of the amounts misapplied. 4. The second plaintiff, Mr Stark, makes separate claims based on distinct causes of action. They do not need elaboration. 5. In addition, in related proceedings, the lenders seek to enforce securities held by them, including, as I understand it, guarantees given by the principals of Staway (or by the beneficiaries of its business) and mortgages, including over residential property, given in support of those guarantees. 6. The present and related proceedings have been fixed for hearing to commence on 14 August 2017. The estimate of duration is some four weeks. 7. By notice of motion filed on 7 March 2017, the lenders sought two orders: 1. that the plaintiffs pay, on the indemnity basis, the lenders' costs of an abortive mediation ordered by the court, and conducted (to the extent it was) on 17 February 2017; and 2. that Staway give further security for the lenders' costs, specifically in relation to the hearing. 1. The motion was argued on 7 April 2017. Mr Lazarus of counsel appeared for Staway. Mr Foreman of counsel appeared for the lenders. I dealt with the application for costs of the mediation, and made orders, for reasons that I gave on 7 April 2017. I heard full argument on the application for security for costs. However, because the estimate of duration given by counsel was grossly inaccurate, I was forced to reserve my decision. This is my decision on the lenders' application for security for costs. 2. There is no doubt that the jurisdictional requirement prescribed by UCPR r 42.21 or, if it is relevant, s 1335 of the Corporations Act 2001 (Cth) has been proved. Staway did not contend otherwise. 3. Mr Lazarus submitted that Staway was not a plaintiff, and hence that the question of its inability to pay costs was irrelevant. For the same reason, he submitted, no order for security should be made against it. 4. That submission turned on the form of an order made by Black J on 21 June 2013 [1] . Black J ordered that two individuals, Mr Stark (the second plaintiff in the present proceedings) and Mr Conway, have leave and authority pursuant to s 511 of the Corporations Act and the inherent jurisdiction of the court to initiate and continue what became these present proceedings. Mr Lazarus submitted that in those circumstances, it was really Messrs Stark and Conway who were the plaintiffs (in respect of the claim brought in the name of Staway) in these proceedings. 5. That submission does not sit comfortably with the form of the orders actually made by Black J (read in the light of s 511 of the Corporations Act). Nor does it sit easily with the form of the summons filed by Staway (leaving aside, as presently irrelevant, the separate causes of action advanced by Mr Stark as second plaintiff). However, for reasons that will become apparent, it is unnecessary to express a concluded view on the point. 6. The sum for which security was sought was, in round figures, $242,000. That sum was said to represent a percentage of the total costs that the lenders would incur in preparing for and conducting the hearing. The estimate was based on what was said to be the total solicitor/client costs and disbursements that were likely to be charged, discounted to reflect the fact that not all would be recoverable on an assessment on the ordinary basis, and discounted further to eliminate costs referable to issues other than those arising between Staway and the lenders. 7. Staway raised a number of questions as to the lenders' assessment of the amount of security required. First, it submitted, the costs for which security could be ordered (contrary to its principal position that no security for costs could or should be ordered) related only to the costs of the actual hearing, and not to costs of preparation for that hearing. The submission was based on the form of an earlier order for security for costs, under which the lenders were given security for their costs up until the hearing. That meant, Mr Lazarus submitted, that the lenders could only have security for the costs of the hearing itself. I do not agree. 8. The order made effectively reserved, for later consideration, any application for security for costs of the hearing. In my view, both as a matter of language and as a matter of common sense, those costs would include not only costs actually incurred in the hearing itself (that is to say, for every actual day of hearing), but also the costs of proper preparation for hearing. In other words, I think, the security that has been ordered to be given was security for costs that were likely to be incurred in getting the matter ready for hearing: preparation of evidence, applications for discovery, and the like. The implicit liberty to apply for further security for costs related to costs thereafter: costs of and incidental to the hearing, including pre-hearing preparation for matters such as cross-examination, documentary tenders, written outlines of submissions, and all other matters usually done to enable the trial to proceed. 9. Mr Lazarus submitted that the discount for what might be called extraneous issues was insufficient. I am not sure that this is correct. Regardless, and bearing in mind the proposition that security for costs is not necessarily security for all the costs likely to be incurred, were it necessary to fix an amount, I would discount further the amount for which security should be given, and reduce it to $180,000. That hypothetical assessment (hypothetical because I do not think that further security should be ordered) is not really capable of further explication. It is intended to pick up both what seems to me a somewhat overly-generous approach to the estimate of costs likely to be incurred in preparation for hearing and hearing, and what may prove to be an inappropriately small discount for extraneous issues. 10. There are two principal reasons why in my view no further security should be ordered. First, I am satisfied that to order further security would stultify the proceedings. Mr Foreman submitted that since Staway had retained eminent (and expensive) senior counsel for the hearing, it must be assumed to be possessed of sufficient funds. However, the evidence of Messrs Stark and Conway is that they have borrowed from relatives and other private sources the amount necessary to fund the hearing, and that they have no other resources available to them. It may be accepted that they are the individuals who will benefit if Staway makes any recovery. Nonetheless, the evidence satisfies me that they simply do not have the resources to provide security anywhere near the amount that I have suggested might be appropriate, let alone the amount claimed by the lenders. 11. The second reason why there should be no security (and this is quite independent of the first) is that even if the proceedings by Staway itself were stayed, the issues raised by it would be litigated. That follows, simply because the matters on which Staway relies in its claim against the lenders are relied upon also by Staway and its guarantors in their defence of the lenders' cross-claim. They are also relied upon by the guarantors in defence of the lenders' claims under the guarantees and in respect of the mortgages supporting those guarantees. 12. In short, the issues upon which Staway relies will be litigated regardless. They will be litigated whether or not Staway's action is stayed consequent upon a failure to give security for costs (which, I find, would happen were security to be ordered in the amount of $180,000). The only effect of ordering security and ordering a stay in default would be to prevent those issues being litigated for the direct benefit of Staway. 13. For those reasons, I conclude that the application for security for costs must fail. It is not necessary to address the numerous other arguments advanced for Staway. 14. I turn to the question of costs of the notice of motion. The lenders succeeded in obtaining an order that the plaintiffs pay the costs of the mediation, and do so on the indemnity basis. However, the lenders have failed to obtain an order for further security for costs. 15. Rule 42.7 suggests that the costs of the notice of motion might be reserved. However, in my view, that would be inappropriate. The appropriate outcome would be that the lenders have their costs, assessed on the indemnity basis, relating to prayer one of the notice of motion (the prayer seeking an order for costs in respect of the mediation) and that Staway have its costs of prayers 2 and 3 (relating to security for costs). The costs that Staway should have would be assessed on the ordinary basis. 16. In the ordinary way, where there are opposing costs orders, the court may try to find a percentage, one way or the other, that reflects the relative degrees of success and failure. In the present case, I do not think that this is appropriate, in part because the order in favour of the lenders would be against both plaintiffs, whereas the order in favour of Staway would be in its favour alone (the lenders sought no security for costs from Mr Stark). Further, although I think it is fair to say that the greater part of the hearing was devoted to the application for further security (and, certainly, the greater part of the evidence was), I have no real impression of how one might fashion an order to give effect to those perceptions. 17. In the circumstances, I think, regrettable though it is (both by reference to s 56 of the Civil Procedure Act 2005 (NSW) and because it will impose what may be an onerous task on some unhappy costs assessor), the safer course is to make discrete costs orders, to be set off to the extent appropriate. 18. I make the following further orders: 1. Order the plaintiffs to pay the defendants' costs of prayer 1 of the defendants' notice of motion filed on 7 March 2017, such costs to be assessed on the indemnity basis. 2. Order the defendants to pay the first plaintiff's costs of prayers 2 and 3 of that notice of motion. 3. Order that as between the first plaintiff and the defendants, costs so payable be set off. 4. Order that the notice of motion otherwise be dismissed. 5. Direct that the exhibits tendered on the hearing of the notice of motion be handed out.