Federal Court of Australia

KTC v David (Security for Costs) [2024] FCA 911

ORDERS

THE COURT ORDERS THAT:

1.    The parties provide a short minute of order to give effect to these reasons within 7 days.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

PERRAM J:

1    The Second and Third Respondents (‘the Singh Parties’) apply for an order that the Applicant (‘KTC’) put up security for its costs. KTC is a company registered in the Cayman Islands and has no assets in Australia. At an earlier stage of the proceedings this led to the making of orders by consent that KTC put up $670,000 as security for the costs of the Singh Parties. This originally occurred on 14 November 2018. The ambit of the present dispute between the parties is twofold: whether this further application is premature and, if not, the appropriate quantum of security. It is convenient to begin with the latter question. The security which the Singh Parties seek has three elements: (a) evidence, discovery, mediation and associated tasks; (b) preparation for trial; and, (c) trial costs.

Evidence, discovery, mediation and associated tasks

2    The orders for security made on 14 November 2018 were made by consent but nevertheless included a right in the Singh Parties to apply for further security in the future, provided that the new security did not relate to the matters set forth in the affidavit which had been sworn in support of the original application. That affidavit had included, amongst other things, elements for the review and preparation of lay and expert evidence, preparation of a position paper for a mediation and discovery. This led KTC to submit that no further security could (or should) be ordered. This is indeed what the orders say. However, the Singh Parties submitted that circumstances had changed and this provided a justification for varying the previous orders. The principal alteration in circumstances upon which the Singh Parties relied was the fact that much of the security had been consumed in dealing with KTC’s multiple attempts to amend its pleadings. To that I would add that the delays thereby engendered also resulted in the security being significantly eroded by inflation in the period 2018 to 2024. I therefore accept that it is appropriate to depart from the terms of the earlier orders and permit the Singh Parties to seek security in respect of lay and expert evidence, the mediation paper and discovery.

3    A costs specialist retained by the Singh Parties, Mr Dudman, estimated in 2018 that the Singh Parties’ total costs up to and including a mediation would be:

4    As at today’s date, this work has not been entirely completed.

5    The Singh Parties’ written submissions at [17] when read with footnote 17 reveal that they do not press an entitlement to security for the first item. The solicitor for KTC, Mr Stents, accepts that the work contemplated in this table is reasonable but he disputes the appropriate discounts and the identity of some of the personnel doing the work (i.e. he says some of the work should not be being done by a partner). I do not think it appropriate to determine on this application whether these costs will be not unreasonably incurred for the purposes of assessment (that being the relevant standard on party-party costs). Such an analysis would be disproportionate to the task at hand. If there were shown to be glaring problems, a different course might be appropriate.

6    From Mr Dudman’s table I would take out the costs for discovery. There should in due course be an order for security for discovery but this should await knowing more about how large discovery is going to be.

7    Although the proceeding is acrimonious, I am not persuaded at this stage that a mediation is either pointless or unlikely to happen.

8    As originally structured, KTC’s case involved two allegations which required expert valuation evidence. The first was its allegation that the initial sale of the business had occurred at an undervalue. The second concerned what the value of the business as a going concern was. During the period in which the proceeding has been pending, the business has since been sold and it is no longer necessary to assess the value of the business as a going concern. Nevertheless, it will remain necessary to determine whether the initial sale of the business occurred at an undervalue and on this question expert valuation evidence will be necessary. Mr Dudman’s estimate of the cost of the expert evidence was based on his assumption that one valuation expert would be called by the Singh Parties. This assumption would appear to be correct. I do not think it appropriate therefore to reduce his estimate on the basis that there is only one valuation exercise now to be conducted whereas previously there were two.

9    On the other hand, I do think it appropriate to reduce the overall sum because of the likely evidentiary overlap with the proceedings brought by Re.Group against Messrs Adam and Charif Kazal. The matters raised by the Kazals’ honest belief defence largely overlap with the basic factual allegations KTC makes against the Singh Parties in this proceeding although it is evident that the quantum cases are different. Although it is difficult to be precise about this, it would appear likely that the overlap in terms of lay and expert evidence will be about 75%. I proceed on the basis that 75% of the Singh Parties’ costs are likely on a taxation or assessment to be shared between the two cases; that is to say, if successful, the Singh Parties are likely to seek taxation or assessment of 37.5% of their costs from KTC together with taxation or assessment of 37.5% of their costs from the Kazal brothers in the Re.Group proceeding. The Singh Parties will also be entitled to seek taxation or assessment of the remaining 25% of their unshared costs in this proceeding. In total, therefore, it would be appropriate to proceed on the basis that the Singh Parties will be entitled to seek taxation or assessment of 62.5% of their costs in the KTC proceeding (the sum of 37.5% and 25%).

10    I therefore think that Mr Dudman’s estimate of the costs for the lay and expert evidence and of the mediation should be discounted to 62.5% of his estimate (i.e. discounted by 37.5%). I do not think that the costs of the interlocutory applications, the security for costs application or the general correspondence should be reduced in that way since I am not satisfied that they bear the same relationship to the Re.Group proceeding.

11    These conclusions result in alterations to Mr Dudman’s table as follows:

12    To this I would apply a discount of 35% to reflect the likely recovery on taxation or assessment to yield a figure for these steps of $254,130.50. I do not agree with Mr Stents’ suggestion that costs should be calculated on the basis of the costs set out in Schedule 3 to the Federal Court Rules 2011 (Cth) to which should then be applied a further discount of 35% to reflect likely recovery. The costs in Schedule 3 are the allowable costs on taxation. Taxation and assessment are alternatives and Mr Stents’ approach results in a double discount. I will apply a discount of 35% only.

Preparation for trial and trial costs

13    In addition to those costs, the Singh Parties now claim $270,000 for trial preparation costs. For the reasons I have given these costs should be discounted by 37.5% (to reflect their relationship with the Re.Group proceeding) and a further discount of 35% should be applied to reflect the likely assessment process. This yields $109,687.50. The Singh Parties also claim $500,000 for the costs of a 15-day trial which, reduced by 37.5% and then 35%, is $203,125. I would only grant security up to and including the first day of the trial. This is often a sensible way to proceed once one goes beyond a short case since the duration of the trial will often only become clear on its eve. If the case commences, then KTC should be in a position on the first day of the trial to provide security for the remaining days of the trial. On that basis, I would set the appropriate security at $13,541.66 (being one-fifteenth of $500,000 discounted by 37.5% and then 35%).

14    The three elements then total as follows:

The original security orders

15    The original security orders were made on 14 November 2018. As at 29 October 2018 the Singh Parties had incurred costs of $367,002. Part of this related to KTC’s application for freezing orders. That application was dismissed on 9 November 2018 by White J and KTC was ordered to pay the Singh Parties’ costs forthwith. On 9 November 2018 it is apparent from a letter from the Singh Parties’ solicitors that the costs which related to the freezing orders amounted to $164,324. The Singh Parties offered to settle KTC’s liability to pay that costs order and the outcome of the security for costs application on the basis that KTC forthwith pay them $120,000 and put up security in the sum of $670,000. This offer was accepted and it was in that context that the security orders for $670,000 were made on 14 November 2018 by consent.

16    Between 29 October 2018 and 19 June 2024 the Singh Parties incurred a further $276,971.18 in costs. Thus, their total costs to 19 June 2024 were the sum of $367,002 and $276,971.18, i.e. $643,973.18. However, from this must be deducted the sum of $164,324 being the costs associated with the freezing orders application and in respect of which the parties settled for $120,000. The Singh Parties cannot recover the costs of the application twice. Thus, the actual costs incurred to 19 June 2024 are $643,973.18-$164,324 = $479,649.18. I will proceed on the basis that a 35% discount should be applied to this to yield likely assessed costs of $311,771.96. I have not applied the 37.5% discount to these costs because it is unclear to me the extent to which these costs are actually likely to have been shared with the Re.Group proceeding.

17    The security already provided is $670,000. It follows that this security is not yet exhausted as to the difference between it and $311,771.96 (which is $358,228.04). Above I have concluded that the Singh Parties should, at this stage, have security in the sum of $377,359.66. However, since $358,228.04 of the earlier security remains unexhausted, this figure should be reduced to $19,131.62 ($377,359.66-$358,228.04).

Prematurity and Gilbert + Tobin

18    KTC submitted that because the security was not yet exhausted the present application was premature. Given that the security is nearly exhausted I do not think that the timing of the application should stand in the way of the grant of further security. KTC also submitted that the removal of the Gilbert + Tobin parties had meant that the scope of work which would need to be done by the Singh Parties should be reduced. I do not accept this submission. I do not think that the Singh Parties’ preparation or conduct of their case was materially related to the presence of the Gilbert + Tobin parties, who were being sued on a quite different basis. I would have accepted that Gilbert + Tobin’s presence would have made the trial longer but where I have only ordered security up to the first day of the trial, this has no continuing relevance.

Conclusion

19    I will therefore order security in the amount of $19,131,62 to cover the Singh Parties’ costs up to the first day of the trial. This will be without prejudice to the right of the Singh Parties to apply for security for discovery once the scope of that exercise is known. On the first day of the trial KTC should be in a position to provide security for the balance of the trial. The Singh Parties sought $1,211,070 in security whereas KTC’s position was that no security should be granted. The outcome is much closer to KTC’s position than it is to that of the Singh Parties. The appropriate costs order is that KTC’s costs should be costs in the cause. The parties should bring in a minute of order within 7 days to give effect to these reasons.

Associate:

Dated:    14 August 2024