Laith & Fadi Investments Pty Ltd v Fogo Brazilia Holdings Pty Ltd

In these representative proceedings, each of the defendants, Fogo Brazilia Holdings Pty Ltd, Ian David Dresner, Hilton Seskin and Lazarus Legal Group Pty Ltd, has applied for security for costs to be provided by the two lead plaintiffs, Laith & Fadi Investments Pty Ltd and Laith Karim Hana and a stay of the proceedings until such security is paid.

The substantive dispute in the representative proceedings involves a class action in which the lead plaintiffs claim relief against the defendants on behalf of Group Members who purchased rights to operate fast food restaurants as part of a franchise known as the ‘Fogo Brazilia Churrasco Grill’ (FBCG franchise). FBCG franchise restaurants operated in shopping mall food courts and sold Brazilian style churrasco grilled meat and associated products. The franchisor, Fogo Brazilia Franchise Holdings Pty Ltd, is in liquidation.

The lead plaintiffs operated an FBCG franchise in Wetherill Park, New South Wales.

The lead plaintiffs — Laith & Fadi as representative for all Group Members who, as franchisees, each entered into a standard form franchise agreement with the franchisor (Franchisee Group Members) and Mr Hana as representative for all directors of the Franchisee Group Members and all guarantors of the Franchisee Group Members’ obligations under the franchise agreements (Guarantor Group Members) — allege that the defendants should be held liable for:

The lead plaintiffs claim damages or compensation against all of the defendants pursuant to ss 236 and/or 243 of the ACL and ss 82 and/or 87 of the CCA and damages at general law against Lazarus Legal.

The amount of security which is sought against the lead plaintiffs by the defendants to the end of the trial differs: Fogo Brazilia and Mr Dresner together seek an amount of $1,625,593.72, Mr Seskin seeks an amount of $956,000 and Lazarus Legal seeks an amount of $887,591.

At the hearing, I made an order that the evidence in each motion formed part of the evidence in respect of all of the defendants’ motions.

Mr N Li appeared for the lead plaintiffs instructed by Levitt Robinson, Mr A Vial appeared for Fogo Brazilia and Mr Dresner instructed by Lazarus Legal, Mr S Sykes appeared for Mr Seskin instructed by APA Lawyers and Ms T Epstein appeared for Lazarus Legal instructed by Sparke Helmore.

For the reasons set out below, I have determined that the lead plaintiffs should provide security for costs to each of the defendants in differing amounts payable in tranches and that there should be a stay of the proceedings if they fail to do so by the date on which each tranche is payable.

In August 2021, the lead plaintiffs commenced the representative proceedings by summons filed 27 August 2021. On 9 September 2021, the lead plaintiffs filed the commercial list statement setting out their claims across 122 pages. The claims are wide ranging, extensive and factually dense.

On 6 July 2022, Lazarus Legal filed its list response. On 27 July 2022, Fogo Brasilia and Mr Dresner filed their list response. On 3 August 2022, Mr Seskin filed his list response. In essence, all of the defendants deny the claims made against them.

The lead plaintiffs have filed a reply to each of the list responses as follows: on 23 September 2022, a reply to the list response of Mr Seskin; on 11 October 2022, a reply to the list response of Lazarus Legal; and on 12 December 2022, a reply to the list response of Fogo Brasilia and Mr Dresner.

On 26 October 2022, Lazarus Legal filed an amended list response.

On 14 May 2024, the lead plaintiffs provided the defendants with a proposed amended commercial list statement in which it has removed all breach of duty of care claims against Lazarus Legal. The proposed amended commercial list statement has not yet been filed.

The lead plaintiffs have served extensive lay and expert evidence and an opt-out notice has been issued. After the determination of the applications before me, the next step in the proceedings is the service of the defendants’ lay and expert evidence. The proceedings have not yet been set down for trial.

The opt out notice refers to 17 franchises (including the franchise of Laith & Fadi). There are two lead plaintiffs and, without double counting one of the Franchisee Group Members who is also one of the Guarantor Group Members (Abu Syeed), there are 48 corporate and individual Group Members in total, 16 of which are corporations. In essence, it is a closed group.

In March 2018, the lead plaintiffs and their solicitors, Levitt Robinson, among others, entered into a Funding Agreement with Galactic Fogo Litigation LLC, a United States-based international litigation funder, to provide funding for the costs of the proceedings, including the provision of any security for costs ordered. Among the terms of the Funding Agreement relevant to this application is the following:

On 14 March 2022, Hammerschlag CJ in Eq ordered by consent that the lead plaintiffs pay into court security for the costs of Fogo Brasilia and Mr Dresner up to the close of pleadings in the amount of $110,000 by 18 March 2022. On 23 March 2022, that security was paid into court.

On 22 March 2022, Hammerschlag CJ in Eq ordered by consent that the lead plaintiffs pay into court security for the costs of Lazarus Legal in the amount of $20,000 by 25 March 2022. In April 2022, that security was paid into court.

On 16 June 2022, the lead plaintiffs agreed to pay $50,000 into court as security for the costs of Mr Seskin up to the close of pleadings. On 24 June 2022, that security was paid into court.

In each case it was conceded by the lead plaintiffs that security should be provided in light of the provisions of the Funding Agreement.

On 21 July 2022 Lazarus Legal (in their capacity as the solicitors for Fogo Brazilia and Mr Dresner) sent a letter to Levitt Robinson stating that Fogo Brazilia and Mr Dresner had incurred costs beyond $110,000 in the estimated amount of $286,854.67, that they intended to seek further security of $683,000 for their costs up to the close of evidence and inviting the lead plaintiffs to consent to the provision of further security in that amount. In the letter, Lazarus Legal also requested confirmation within 14 days that the Funding Agreement remained on foot and had not been superseded, varied, or otherwise modified in any way or terminated.

On 9 August 2023, Lazarus Legal sent a further letter to Levitt Robinson noting that there had been no response to their letter of 21 July 2022, repeating their request for the lead plaintiffs to confirm matters relating to the Funding Agreement and advising that, if no response was received and after filing a motion seeking further security for costs, Fogo Brazilia and Mr Dresner would issue notices to produce and subpoenas to the lead plaintiffs to obtain any funding agreement of which the lead plaintiffs were beneficiaries.

On 23 August 2023, Levitt Robinson sent a letter to Lazarus Legal responding to their letters of 21 July 2022 and 9 August 2023, confirming that the Funding Agreement remained current and that Galactic remained responsible for funding the representative proceedings.

On 25 August 2023, Levitt Robinson sent a further letter to Lazarus Legal accepting that an additional amount should be paid into court as security for the costs of Fogo Brazilia and Mr Dresner, but contesting the proposed quantum of $683,000. Levitt Robinson referred to Lazarus Legal’s incurred costs of $286,854.67, stating that no explanation was provided as to how such costs were incurred and to what aspects of the representative proceedings they related. Further, Levitt Robinson disputed the basis of Lazarus Legal’s estimate of their future costs, stating that the estimated costs for responding to lay and expert evidence may be overstated and were based on conjecture, as the lead plaintiffs’ evidence had not yet been served and no order for the provision of expert evidence had been made.

On 29 November 2023, Levitt Robinson sent a letter to Lazarus Legal setting out their estimate that the costs likely to be incurred by Fogo Brazilia and Mr Dresner from that point in the representative proceedings onwards was approximately $576,666 and the basis on which that amount had been calculated. The letter concluded by stating that the lead plaintiffs did not presently accept that they were required to provide further security in respect of costs incurred up to the close of pleadings.

On 12 February 2024, Fogo Brazilia and Mr Dresner filed the notice of motion seeking security for their costs in the amount of $1,625,593.72. This is one of the applications that I am to determine.

On 23 August 2023, APA Lawyers (the solicitors for Mr Seskin) sent a letter to Levitt Robinson stating that Mr Seskin’s actual costs and disbursements to the close of pleadings were $147,699.68, which exceeded the security for costs of $50,000 paid into court by $97,699.68 and, after an allowance of a reduction of 33% to estimate party/party costs, the shortfall in security was $48,958.78. APA Lawyers also stated that Mr Seskin had incurred additional costs of $83,972.63 since the close of pleadings up to 31 July 2023 and that the costs of Mr Seskin to 31 July 2023 after the close of pleadings, less an amount of 33% to estimate party/party costs, were $56,261.66. APA Lawyers stated that they intended to apply for further security in relation to Mr Seskin’s costs to the end of the trial and that they would file that application if Mr Seskin’s claim for security could not be resolved. The letter concluded with APA Lawyers asking for confirmation that the lead plaintiffs would provide additional security of $105,220.44, being the total of the party/party costs estimated for Mr Seskin’s costs up to 31 July 2023 in addition to the $50,000 already paid into court by the lead plaintiffs.

On 29 November 2023, Levitt Robinson sent a letter to APA Lawyers responding to their letter of 23 August 2023. Levitt Robinson stated that they estimated that the costs likely to be incurred by Mr Seskin from that point onwards were approximately $459,415 and set out the basis for the calculation. Levitt Robinson stated that on the basis that 70% of the incurred costs would be allowed on assessment, this amount would reduce to $321,591.

On 18 December 2023, APA Lawyers sent a letter to Levitt Robinson setting out their calculations of Mr Seskin’s costs to the close of pleadings ($147,699.38, with a 33% reduction to $98,958.78), the costs from the close of pleadings to 31 July 2023 ($83,972.63, with a 33% reduction to $56,261.66) and Mr Seskin’s costs from 1 August 2023 up to and including the final hearing of the proceedings ($1,269,935, with a 33% reduction to $850,856.45). The letter concluded by requesting that the lead plaintiffs consent to providing further security in the amount of $956,000 (including GST), failing which an application for further security would be made.

On 12 February 2024, Mr Seskin filed the notice of motion seeking security for his costs in the amount of $956,000. This is another of the applications I am to determine.

On 30 August 2023, Spark Helmore (the solicitors for Lazarus Legal) sent a letter to Levitt Robinson stating that the costs incurred by Lazarus Legal in the proceedings exceeded the amount originally anticipated, with Lazarus Legal having incurred costs and disbursements of approximately $90,000 to date. The letter then set out the calculation of the further costs and disbursements that Lazarus Legal would incur in defending the proceedings to the conclusion of the trial of approximately $1,072,500. Spark Helmore stated that in an endeavour to avoid dispute over the quantum of security to be provided, they were instructed to accept further security on the basis of 70% of the estimated future costs, which was $750,750. They concluded by stating that if the amount of the further security could not be agreed then an application to court would be made.

On 29 November 2023, Levitt Robinson sent a letter to Spark Helmore responding to their letter of 30 August 2023. Levitt Robinson stated that their estimate of the costs likely to be incurred by Lazarus Legal was the amount of $470,166 and that on the basis of 70% of incurred costs would be allowable on assessment, that amount would reduce to $329,116.

On 30 November 2023 at 11:04am, Spark Helmore sent an email to Levitt Robinson stating that they would consider their letter and seek instructions and asking whether they should tell Lazarus Legal that the letter from Levitt Robinson constituted an offer to provide security in the sums mentioned.

On 30 November 2023 at 12:54pm, Levitt Robinson sent an email to Spark Helmore stating that their letter was not an offer and had invited confirmation from Lazarus Legal as to its position on the extent to which it would be inappropriate for some of the costs already incurred to be taken into account for the security for costs.

On 12 February 2024, Lazarus Legal filed the notice of motion seeking security for its costs in the amount of $989,564.74.

On 19 April 2024, Lazarus Legal filed the amended notice of motion seeking security for its costs in the amount of $887,591. This is the last of the applications I am to determine.

On 22 April 2024, Galactic sent a letter to Levitt Robinson referring to an email Levitt Robinson had sent to Galactic on 12 April 2024 (defined as “Your Email”) which evidently attached copies of those parts of the correspondence between the parties outlined above whereby the plaintiffs offered to pay certain sums of money by way of security for the defendants’ costs. By that letter, Galactic terminated the Funding Agreement, relevantly stating:

During the hearing, the lead plaintiffs accepted that Galactic’s termination of the Funding Agreement was not brought about by any conduct on the part of the defendants (T57).

From an email dated 18 September 2024 from David Purcell of Litigation Funding Solutions (a broker of litigation funding) to Mr Rappaport of Levitt Robinson, it would appear that Galactic may have asserted an ongoing right to receive a benefit should the lead plaintiffs succeed in these proceedings.

Until the Funding Agreement was terminated, the lead plaintiffs were not contesting that it was appropriate that further security be ordered in favour of the defendants but only put in issue the quantum of that further security. The position of the lead plaintiffs changed with the termination of the Funding Agreement, as the costs of the lead plaintiffs in these proceedings are no longer funded by Galactic. As I have outlined in more detail below, the lead plaintiffs now argue that the proceedings will be stultified if they are ordered to provide security by reason of their inability to pay.

Relevant to the question of the funding of the lead plaintiffs’ costs, at the hearing, the defendants made a concession — limited to their respective security for costs motions — that they would not submit that the lead plaintiffs failed to discharge their onus with respect to obtaining funding from an external third party litigation funder (T17.15–26). Accordingly, it is not necessary for me to consider the attempts made by the lead plaintiffs to obtain any further litigation funding after the termination of the Funding Agreement.

It is, however, necessary to determine the financial position of the lead plaintiffs, those persons standing behind them and the Group Members.

Company searches of Laith & Fadi establish that it has paid-up capital of $2 with two shareholders and directors, being Mr Hana and Fadi James Youssef. A property search of Laith & Fadi reveals that it has no property interests in Australia.

It is common ground that Laith & Fadi is impecunious, is not trading and remains incorporated for the sole purpose of prosecuting these representative proceedings.

The notice of assessment issued by the Australian Taxation Office for Mr Hana for the year ending 30 June 2023 shows that his taxable income was $111,375, his assessed tax payable was $26,553.87 and, after the deduction of PAYG withholding tax already paid, he was liable to pay $488.55 in income tax by 22 April 2024.

Mr Hana currently receives income from the following two management companies:

The total of these income amounts is $119,895 per annum, which is $9,991.25 per month. Mr Hana says that he has never received any dividends from Paramount Building or House of Finance Aus.

According to Mr Hana, his monthly living expenses are $8,500 and monthly mortgage repayments are $5,030, totalling $13,530 per month or $162,360 per annum. Based on Mr Hana’s income for 2023 of $119,895, he is spending more per month and per annum than he receives in income.

Mr Hana says Paramount Building runs at a loss and that his shares are of negligible or no value. No further financial information about Paramount Building was provided at the hearing.

Mr Hana is also one of two directors and a 50% shareholder of House of Finance Group Pty Ltd which carries on a finance brokerage business. House of Finance Group derives commission income from each loan it originates, with the commission income split into an upfront commission payable on the first drawdown of the loan and trail commission payable as a percentage of the outstanding balance of the loan for its life until it is repaid or refinanced. For the year ended 2023, House of Finance Group earned $1.9 million in upfront commission income and trail commission income of about $700,000.

Mr Hana says that the trail commissions are not able to be sold without the unanimous consent of the other director and shareholder of House of Finance Group, who does not currently consent.

House of Finance Aus receives approximately $1 million revenue per annum or $83,333 per month from House of Finance Group for management fees, which is its only source of income.

The monthly expenses of House of Finance Aus total between approximately $47,750 and $63,250, giving House of Finance Aus a net surplus of between approximately $25,083 and $30,583 which is lent to Mr Hana and used by him to lend to various property development entities.

Mr Hana estimates his savings as being approximately $40,000.

According to property title searches, Mr Hana has engaged in the following property dealings in his own name between 2019 and 2024:

The first Wurmbea Way property is currently desktop valued by Domain at $1.21 million and subject to a mortgage in the amount of $900,000. Mr Hana is the registered proprietor of the first Wurmbea Way property. Mr Hana says that his uncle contributed 50% of the purchase price and construction costs of the first Wurmbea Way property and has a beneficial interest in it. It would appear that Mr Hana is entitled to half of the proceeds if a sale of the first Wurmbea Way property ever occurs.

Mr Hana is also involved in seven property development projects that are each undertaken through the operation of special purpose vehicles (SPVs), where each of the SPVs purchase and manage development of the land.

Each of these SPVs are funded by investors, who contribute capital (up to 20%) in return for receiving units in the relevant SPV, and banks, who provide loans that are secured by the underlying assets of the relevant SPV. Investors are required to provide funds for any construction costs, whether they be contemplated at the outset or incurred afterwards — for example, where costs are overrun or disputed.

According to Mr Hana, calculating the value of the units in the SPVs is difficult because their value is subject to delays and increased costs of the property developments and ultimately depends upon their overall profitability. No evidence of the value of Mr Hana’s units in the SPVs was given.

Mr Hana says that the properties owned by each of the SPVs cannot be sold without the consent of their unitholders and, as a result, these investments are highly illiquid. Of the seven development projects, Mr Hana estimates that the SPV property closest to completion is at least another 12 months away.

Mr Hana says that the business of House of Finance Group could be valued at approximately 1.5 times its current trail revenue of $700,000, which is $1,050,000. Mr Hana says that the upfront commission would be wholly discounted when valuing the business of House of Finance Group, although no reason was put forward for explaining why this would be the case.

No expert evidence of the value of House of Finance Group or House of Finance Aus was provided by the lead plaintiffs.

House of Finance Aus has provided loans to Mr Hana in the sum of $2.2 million for his various property developments, which are not repayable until the developments are completed and sold.

As stated above, Mr Hana says that Paramount Building runs at a loss and that his shares in it are of negligible or no value.

By 2019, Mr Hana says that he discharged his debts in the amount of $100,000 that were incurred by him in connection with being a franchisor, being a personal loan of $21,000 and credit card debt.

Mr Hana estimates that he owes $2.2 million to House of Finance Aus.

House of Finance Aus has $260,000 in current liabilities for three motor vehicle loans and a credit card debt, requiring monthly repayments of $8,750 and $5,000 to $10,000 respectively.

Mr Hana has one dependent who is 15 months of age.

According to Mr Hana, he would need to obtain a further loan of $50,000 from the House of Finance Aus to allow him to contribute money into court for the purpose of funding these proceedings.

For the financial year ending 30 June 2023, Katya Hana (Mr Hana’s wife) had a taxable income of $135,246, the sources of which were:

Mrs Hana is currently employed by House of Finance Aus for which she receives a salary of $130,000 per annum (excluding superannuation).

Mr Hana is not only one of the lead plaintiffs; he is also a person standing behind Laith & Fadi because he is one of the shareholders in it. His financial position as outlined above is therefore relevant to the financial position of Laith & Fadi.

The other shareholder of Laith & Fadi is Mr Youssef. No evidence has been provided of Mr Youssef’s financial position.

According to the evidence of Justin Reynolds, a solicitor employed by Levitt Robinson, he unsuccessfully attempted to telephone Mr Youssef on two occasions: an unspecified day before 3 June 2024 and on 12 September 2024.

All of the material put before the court by the lead plaintiffs as evidence of the financial position of the Group Members was elicited by way of telephone calls between Justin Reynolds (a solicitor employed by Levitt Robinson) and each Group Member or a member of their family or an email sent by Mr Reynolds to a Group Member.

The defendants put in issue the weight that such evidence can be given, in light of the fact that the evidence has been expressed in the most general terms, the questions asked in each of the communications has not been disclosed, there is no direct evidence from any Group Member, there is no documentary evidence to support the assertions made about the financial position of the Group Members and the evidence does not permit the court to know the precise financial position of each of the Group Members. I agree that very little weight can attach to this evidence for the reasons given by the defendants.

To the extent that it can be discerned from the limited nature of the assertions contained in the evidence, the respective financial positions of the Group Members are as follows:

Mr Syeed was the Merrylands franchisee and a director of NAS Enterprises (NSW) Pty Ltd, one of the three Liverpool New South Wales franchisees.

Ms Huq is the wife of Mr Syeed. Ms Huq is a director of NAS Enterprises (NSW) Pty Ltd.

NAS Enterprises (NSW) Pty Ltd no longer trades and has been deregistered.

Mr Syeed is an employee and 70% shareholder of OM Proprietors NSW Pty Ltd, but does not receive any income.

Mr Syeed jointly owns a property of unspecified value with Ms Huq and takes out loans leveraged against his equity, which he says is minimal, to pay his monthly expenses.

Mr Syeed owns an Audi Q5 (2015) with an estimated value of $25,000.

Mr Syeed and Ms Huq have one dependent child who is 12 years of age.

Mr Syeed indicated that he was unable to contribute any money for the continuation of these proceedings because to do so would cause an inability to meet his own debts and family expenses, and Ms Huq was unwilling to provide any information about her financial position to Levitt Robinson.

Mr Islam is a director and guarantor of Golden Peak Australia Pty Ltd, the Bondi Junction New South Wales franchisee.

Golden Peak Australia Pty Ltd no longer trades.

Mr Islam receives a net income of $45,000 from his work as an Uber driver and owns two vehicles: a Toyota Rav 4 (2008) with an estimated value of $7,000 and a Toyota Camry (2014) with an estimated value of $8,000.

Mr Islam has two dependents who are 7 and 11 years of age respectively.

According to Mr Islam, he does not have any disposable income after meeting his expenses, the details of which were not provided.

Mr Hossen is a director and guarantor of Golden Peak Australia Pty Ltd, the Bondi Junction New South Wales franchisee, and a director and guarantor of R&F Innovation Enterprise Pty Ltd, the Darling Harbour New South Wales franchisee.

As indicated above, Golden Peak Australia Pty Ltd no longer trades.

R&F Innovation Enterprise Pty Ltd generates an annual revenue of $100,000, has an existing credit card liability of $10,000 and provides Mr Hossen with an annual net income of $77,024.

Mr Hossen jointly owns a property with his wife valued at $1.3 million, encumbered by a mortgage of $1 million and is required to make monthly mortgage repayments of $6,000. During COVID-19, the mortgagee did not require Mr Hossen to make any mortgage repayments. Following the resumption of mortgage payments, Mr Hossen has needed financial assistance from his family and friends to meet these repayments, with a total amount owing of $70,000.

Mr Hossen owns two vehicles: a Mazda CX9, with an estimated value of $30,000, and a Honda Civic, with an estimated value of $4,000.

Mr Hossen has two dependents who are 2 and 11 years of age respectively. His wife does not work.

According to Mr Hossen, he does not have any disposable income after meeting his expenses and will not be able to contribute any money for the costs of these proceedings.

Mr and Mrs Dominguez are the directors and guarantors of A&L Dominguez Pty Ltd, the Penrith New South Wales franchisee.

A&L Dominguez Pty Ltd does not trade and is dormant pending the outcome of these proceedings.

Mr Dominguez is currently employed at Westpac Banking Corporation and has a gross annual income of $205,000, excluding superannuation. Mrs Dominguez is currently employed at Commonwealth Bank of Australia and has a gross annual income of $155,000.

Mr and Mrs Dominguez jointly own a property valued at $1.7 million, encumbered by a mortgage of $1.324 million. They also jointly own a vehicle with an estimated value of $10,000, and $20,000 of shares in Westpac Banking Corporation.

Mr and Mrs Dominguez have three dependents who are 19 months, 4 years and 8 years of age respectively.

Mr and Mrs Dominguez have annual childcare expenses of $70,000 and a joint credit card liability of $10,000.

Separately, Mr Dominguez leases a Toyota Kruger valued at $70,000 and the same amount is outstanding on the lease. He also owns $3,000 of shares in Westpac Banking Corporation. Mrs Dominguez owns $3,000 of shares in Commonwealth Bank of Australia.

According to Mr Dominguez, he will not be able to contribute any money for the costs of these proceedings.

Mr Hassan and Mr Rana are former directors and guarantors of DOAA & JAWAD Pty Ltd, the Narellan New South Wales franchisee.

DOAA & JAWAD Pty Ltd has been deregistered.

Mr Hassan is currently employed by Qube Logistics and has an annual net income of $70,000.

Mr Hassan jointly owns a property with his wife valued at $900,000, encumbered by a mortgage of $550,000. His wife is a casual employee of Campbelltown Council, working two days a week.

Mr Hassan also owns two vehicles: a Kia Sportage (2022) valued at $22,000; and an MG (2022) valued at $15,000.

Mr Hassan has a credit card liability of $7,000, which he incurred in purchasing the MG.

Mr Hassan has three dependents and he says he is unable to contribute any money for the costs of these proceedings.

No financial information has been provided in relation to Mr Rana as he did not respond to the inquiries of Levitt Robinson.

Mrs Jammula and Mr Akavaram are directors of VSKM Pty Ltd, the Highpoint Victoria franchisee. They are married to each other.

VSKM Pty Ltd continues to trade.

Mrs Jammula is currently employed by VSKM Pty Ltd, has an annual net income of $50,000, owns a property of unspecified value, encumbered by a mortgage, and has equity in the property of $50,000.

Mr Akavaram is a director, 33.3% shareholder and employee of Asetron Private Limited Pty Ltd, receiving an annual net income of $70,000. He owns a property of unspecified value, encumbered by a mortgage, and has equity in the property of $100,000.

Mrs Jammula and Mr Akavaram have two dependents who are 7 and 11 years of age respectively.

According to Mrs Jammula and Mr Akavaram, they are each able to contribute $1,000 for the costs of these proceedings, being the total amount of Mrs Jammula’s monthly disposable income after expenses and twice the amount of Mr Akavaram’s monthly disposable income after expenses.

Mrs Mogili is a former director of VSKM Pty Ltd, the Highpoint Victoria franchisee.

Mrs Mogili has no income, no assets, two dependents and her husband is responsible for their family’s monthly expenses. According to Mr Mogili, she will not be able to contribute any money for the costs of these proceedings.

Mr Elmahrakawy is a director and guarantor of Melbourne United Group Pty Ltd, the Frankston Victoria franchisee.

Melbourne United Group Pty Ltd has ceased to trade and is deregistered.

Mr Elmahrakawy has no annual income, no assets of value, no dependents and is financially supported by family and friends. According to Mr Elmahrakawy, he cannot make any financial contribution to the costs of these proceedings.

Mr Dowla and Mr Hasnain are directors of Swapno Pty Ltd, the Macarthur Square New South Wales franchisee.

Swapno Pty Ltd is no longer trading.

Mr Dowla is employed at an unnamed business and receives an annual net income of $80,000. He jointly owns two properties of unspecified value with his wife, encumbered by mortgages also of unspecified value, in which he says they have minimal equity and have recently refinanced to avoid bank foreclosures.

According to Mr Dowla, he has no disposable income after meeting his expenses.

Mr Dowla has two dependents: an adult child who is living with him at home and a sister who is living overseas.

Mr Hasnain receives an annual net income of $6,000 and has no assets or disposable income after meeting his expenses. He currently lives with his family in Bangladesh and has one dependent.

Ms Begum is a director of RRZ Pty Ltd, the Bankstown New South Wales franchisee.

Ms Begum does not receive any financial support from her former husband, Rafique Ahmed Khan, who now lives overseas. Ms Begum has one dependent who suffers from nervous shock. Ms Begum survives on Centrelink payments of an unstated value and received proceeds from the sale of her home (she is now renting) in the sum of $20,000, which were all applied to pay the lessor of her franchise.

According to Ms Begum, she cannot afford to contribute any money towards the costs of these proceedings.

No evidence has been provided of the financial positions of the following remaining Group Members whom Levitt Robinson has attempted to contact but has been unsuccessful in doing so:

There is no evidence about the financial position of 23 of the 48 Group Members.

No undertaking has been offered by any Group Member to pay the costs of the defendants in the event that these proceedings are unsuccessful.

The lead plaintiffs relied on an affidavit sworn 15 May 2024 by Stewart Levitt (a partner of Levitt Robinson) (Levitt May affidavit) in which Mr Levitt deposed to the following matters:

The lead plaintiffs also relied on an affidavit sworn 3 June 2024 by Mr Levitt (Levitt June affidavit) in which he deposed that he had personally paid the outstanding invoices of counsel for the lead plaintiffs since the termination of the Funding Agreement and has acknowledged liability to counsel for those unpaid invoices.

As at the time of the Levitt May affidavit, no conditional costs disclosure and costs agreement had been prepared or circulated by Levitt Robinson to the lead plaintiffs and Group Members. Exhibited to the Levitt June affidavit there was what was described as “a copy of the executed Conditional Costs Agreement dated 31 May 2024”. But the Conditional Costs Agreement which is exhibited to the Levitt June affidavit was only signed by Mr Levitt on behalf of Levitt Robinson alone on 3 June 2024 and is not signed by any of the lead plaintiffs or Group Members. There is no evidence that the Conditional Costs Agreement has been circulated to the lead plaintiffs and the Group Members for their consideration, even less that they have agreed to it. There is also no evidence of what (if any) arrangements were in place for the retainer of Levitt Robinson by the lead plaintiffs or Group Members at any time prior to the Conditional Costs Agreement.

In light of this evidence, I cannot make any finding that the lead plaintiffs or the Group Members have entered into the Conditional Costs Agreement with Levitt Robinson. In any event, it would appear from the Levitt May affidavit that Levitt Robinson do not act for all of the Group Members, referring to the Group Members who were clients of Levitt Robinson immediately before the termination of the Funding Agreement as “client group members”.

The lack of clarity in the evidence regarding the basis on which Levitt Robinson has been and is acting in the proceedings is troubling and prevents me from finding that it is accepted by the lead plaintiffs and the Group Members that Levitt Robinson will be acting on a speculative basis.

If I am wrong about that finding, then there are particular terms in the Conditional Costs Agreement which are relevant to the determination of these applications.

First, the Conditional Costs Agreement contains the following provisions in relation to the charging of professional fees, internal expenses and disbursements:

The Conditional Costs Agreement also contains provision for the charging of “Administrative Expenses” which are described as charges for photocopying, facsimiles, telephone charges and law stationer’s fees at specified rates, along with costs incurred for the recovery of files from outside storage. I interpret these to be the “internal expenses” to which reference is made in section B of the Conditional Costs Agreement.

In the Conditional Costs Agreement, professional fees are estimated to be $600,000 (with no uplift), disbursements are estimated to be $300,000 and administrative expenses are estimated to be $10,000 (all amounts excluding GST).

Accordingly, if the Conditional Costs Agreement is in operation, whether or not there is a successful outcome of these proceedings for the lead plaintiffs and Group Members, they will be liable to pay Levitt Robinson for disbursements which are incurred, either payable 14 days in advance or 30 days after they are invoiced, estimated to be $300,000.

The lead plaintiffs also relied on evidence that through Levitt Robinson unsuccessful attempts have been made to obtain after the event insurance (ATE insurance) to insure the lead plaintiffs against any adverse costs orders in the proceedings. The evidence demonstrated the following:

There is evidence that a rough estimate of the minimum non-refundable portion of the ATE insurance premium for the lead plaintiffs in these proceedings would be $270,000.

In the course of oral submissions, Mr Seskin submitted that I should give limited weight to the evidence of the prospects of the lead plaintiffs obtaining ATE insurance, and that the lead plaintiffs did not meet the onus of establishing that ATE insurance is not available to them (T38–39). I do not agree. Although I do not have all of the documents relevant to the applications made for ATE insurance by Mr Walker on behalf of the lead plaintiffs, I am satisfied that the lead plaintiffs have demonstrated that the prospect of them obtaining ATE insurance in these proceedings is remote.

There are multiples bases on which the court has jurisdiction to award security for costs in proceedings before it, arising from particular statutory provisions and the inherent jurisdiction of the court.

Rule 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) relevantly states:

Section 1335 of the Corporations Act 2001 (Cth) also confers a power to order security for costs in circumstances where a corporation is a plaintiff, relevantly providing as follows:

A further source of power to award security for costs is contained in s 67 of the Civil Procedure Act 2005 (NSW) (CPA) which provides:

The court may, for example, make an order pursuant to s 67 that proceedings before it be stayed until security for costs is given. In De Jong v Carnival PLC [2016] NSWSC 347, in relation to s 67 of the CPA as a source of implied power to award security for costs in representative proceedings, Beech-Jones J at [45] said the following:

The court also has an inherent jurisdiction to order security for costs. In De Jong, Beech-Jones J at [48] described the inherent jurisdiction in the following way:

Section 181 of the CPA prevents the court from awarding costs against a group member other than a representative party and is in the following terms:

In summary, s 98 of the CPA gives the court the power to determine who should pay the costs of any proceedings and the amount of those costs.

Section 168 of the CPA concerns the determination of questions which are not common to all group members, which is not relevant to the determination of the present applications.

Section 169 of the CPA concerns the liability of an individual group member for the costs associated with the determination of a question which only relates to the claims of that member. That provision is also not relevant to the determination of these applications.

In De Jong, Beech-Jones J at [6] summarised the position of a court ordering security for costs in representative proceedings in the following way:

In De Jong, Beech-Jones J at [51]–[53] accepted that s 181 of the CPA operates so that no order for security for costs can be made against a group member, but rejected the argument that s 181 of the CPA means that no order for security can be made against a representative party, which his Honour said “is not supported by any of the text of s 183 [which gives the court power to make any order that the court thinks appropriate or necessary to ensure that justice is done in the proceedings], the structure of the CPA as a whole or relevant authority.” I agree.

As repeated in De Jong by Beech-Jones J at [24], the longstanding general rule is that security will not be ordered against a natural person solely on the grounds of their impecuniosity, subject to an exception arising where an impecunious plaintiff sues for the benefit of others.

In De Jong, Beech-Jones J at [24]–[27] analysed the authorities concerning the equivalent provisions of r 42.21 of the UCPR and s 181 of the CPA in ss 56 and 43(1A) of the Federal Court of Australia Act 1976 (Cth) (FCAA), delineating at [26] the following five propositions applicable to representative proceedings arising from the decisions of the Full Court of the Federal Court in Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317; [2003] FCAFC 153 and Madgwick v Kelly (2013) 212 FCR 1; [2013] FCAFC 61 (citations omitted):

In Bray, Carr J (with whom Branson and Finkelstein JJ agreed or substantially agreed) at [141] canvassed the balancing of the policy in s 43(1A) of the FCAA that in representative proceedings the group members not be burdened with joint and several liability for a very substantial costs order at the end of the hearing against the risk of injustice to a defendant who has no chance of recovering very substantial costs from the plaintiff if it is successful in defending the proceedings, concluding at [142] that:

In De Jong, Beech-Jones J at [27] considered that the decision in Madgwick also stood for the proposition that solicitors conducting proceedings on the basis that they would only be paid in the event of a successful judgment or settlement were not to be equated with litigation funders; i.e. they were not to be treated as a person standing behind the plaintiff or as a person on whose behalf the proceedings were brought.

In Eades v Endeavour Energy [2018] NSWSC 801, Garling J at [54]–[59] considered the applicable legal principles in the context of determining whether to order security for costs in representative proceedings, quoting the summary of the principles set out in De Jong by Beech-Jones J at [6] and then saying as follows:

The principles set out in De Jong at [26] were expressly approved in Abbott v Zoetis Australia Pty Ltd (No 2) [2019] FCA 462; (2019) 369 ALR 512 by Lee J at [14], who also said at [15]:

The position of an individual lead plaintiff who is a member of a class on whose behalf representative proceedings have been brought was the subject of particular consideration in Its Eco Pty Ltd v BPS Financial Ltd [2022] FCA 842, Derrington J saying at [3]:

These considerations were expanded upon in greater detail later in Its Eco, Derrington J stating at [38]–[39]:

Where there is an impecunious corporate plaintiff, in the exercise of the discretion attention turns to those who stand behind the corporation and stand to benefit from the outcome of the litigation. In Pioneer Park Pty Ltd (in liquidation) v Australia and New Zealand Banking Group Ltd (2007) 65 ACSR 383; [2007] NSWCA 344, Basten JA at [52] said that:

If those standing behind an impecunious corporate plaintiff offer personal undertakings to pay the costs of the defendant if the proceedings are unsuccessful, then their respective financial positions are not relevant: Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276; [2007] NSWCA 291, Basten JA at [32].

The absence of evidence of the financial position of a person standing behind an impecunious corporation who offers no personal undertaking to pay the costs of the defendant is a fundamental matter, which weighs heavily in favour of making an order for security: Jazabas, McClellan CJ at CL (with whom Mason P and Basten JA agreed) at [91].

An impecunious plaintiff who opposes security being ordered on the basis that the conduct of the defendant applying for security caused the impecuniosity must substantiate that claim. In Broadway Plaza Investments v Broadway Plaza Pty Ltd; In the matter of Combined Projects (Arncliffe) Pty Ltd [2019] NSWSC 1082, Ward CJ in Eq (as the President then was) at [196] said:

In essence, an impecunious plaintiff has the onus of proving its financial position before their dealings with the alleged wrongdoers and that the alleged wrongdoers’ actions have caused or at least materially contributed to the plaintiffs’ inability to meet an order for security for costs: Jazabas, McClellan CJ in Eq at [94]–[95].

Among the foregoing principles, the issue of stultification looms large. It is an issue which frequently arises in non-representative proceedings.

Stultification is one of several factors to which a court exercising the discretion whether to order security for costs under r 42.21 of the UCPR may have regard, although it is a powerful factor: Live Board Holdings v Cody Live Pty Ltd [2017] NSWCA 302, Bathurst CJ, Leeming JA and Barrett AJA at [92]. It is expressly referred to in r 42.21(1A)(f) of the UCPR.

In Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11, Hodgson JA considered the relevant approach where a corporate plaintiff contends that an order for security will stultify the proceedings at [23]–[27] as follows:

In LRSM Enterprise Pty Ltd v Zurich Australian Insurance Limited [2014] NSWCA 88, Barrett JA (with whom McColl and Macfarlan JJA agreed) considered that the relevant question in demonstrating impecuniosity concerns inability and not mere unwillingness to provide security, stating at [36]–[37]:

In Live Board Holdings, Bathurst CJ, Leeming JA and Barrett AJA at [90] considered the necessary evidence to satisfy the onus of proving stultification, stating as follows:

The need for the plaintiff asserting stultification to address the issue by proving the necessary facts which establish the financial position of those who stand behind it and who will benefit from the litigation if it is successful is constantly emphasised in the authorities, including recently in Carrano Investment Holding Pty Ltd v Siennamia Investments Pty Ltd [2022] NSWCA 262, by Gleeson JA (with whom Basten and Griffiths AJJA agreed) at [12].

The subjective unwillingness of group members to contribute to the costs of the proceedings in the absence of evidence of their means, so that the court can determine the matter objectively, is either not sufficient (Madgwick, Jessup J at [160]) or is not irrelevant, but the question of the reasonableness of any unwillingness to contribute must be considered in determining what is fair in all the circumstances: Madgwick, Allsop CJ and Middleton J at [83].

In Abbott, Lee J at [42]–[43] decided not to take into account the responses given by group members to a “survey” undertaken of them as to whether they would be willing to provide any security, taking the view that there had been contentious and loaded introductory remarks made to them before they gave their answers and that the sampling of them was “entirely unscientific”.

Where the issue of stultification is raised by an impecunious corporate plaintiff, the failure to prove the financial resources of those standing behind it who do not offer a personal undertaking to pay the defendant’s costs is significant: Jazabas, Basten JA at [32]; Carrano Investment, Gleeson JA at [21].

Recently, in Metro Environmental Logistics Pty Ltd v Newcastle Port Corporation (No 5) [2024] NSWSC 714, Stevenson J noted at [13] that although r 42.21(1A)(f) of the UCPR uses the expression “would stifle the proceedings”, it is customary for the court to address the issue of stultification by reference to whether it is “likely” that an order for security would bring the proceedings to an end.

In Flip Out Thornton Pty Ltd v Flip Out – Trampoline Arena Franchises Pty Ltd [2023] NSWSC 1094, Stevenson J made an order for further security for costs where representative proceedings were funded by a litigation funder from the outset but later repudiated by the litigation funder, stating at [74]–[79]:

The Flip Out proceedings also involved Galactic as the litigation funder and Levitt Robinson as the solicitors acting for the lead plaintiffs.

The submissions of Fogo Brazilia and Mr Dresner can be summarised as follows:

Mr Seskin adopted the submissions made by Fogo Brazilia and Mr Dresner. In summary, Mr Seskin also made the following submissions:

In summary, Lazarus Legal made the following submissions:

In summary, the lead plaintiffs submit that an order for security should not be made for the following reasons:

For the reasons expressed below, in each of the applications before me, I am of the view that on balance the exercise of my discretion requires me to make an order that the lead plaintiffs provide security for the costs of the defendants, payable in instalments at particular stages of the proceedings as they progress. All of the applications made by the defendants can be dealt with together as there are no factors which are relevant to a single application that have any particular overriding weight that would require it to be dealt with separately.

As outlined in Abbott at [15], I am reminded that in determining whether to make an order for security of the defendants’ costs, I am exercising a broad discretion judicially and must have regard to the particular facts of this case. Whilst I have drawn out the principles from various authorities, I have applied them to the unique combination of circumstances that exist in these applications.

In the present case, the power to order security is enlivened on multiple bases: in particular, by the operation of r 42.21(1)(d) and (e) of the UCPR because Laith & Fadi is an admittedly impecunious corporation and the lead plaintiffs are suing not only for their own benefit, but also for the benefit of the other Group Members and those who stand behind them.

The fact that these are representative proceedings brought under Part 10 of the CPA draws into view further considerations which are not present when an application is made in the more regular circumstance of a plaintiff suing for their own benefit alone. There are policy considerations which loom large in representative proceedings such as the present case, where the representative parties are impecunious and raise the issue of stultification, so that particular factors become more relevant in the balancing of the justice of the circumstances between the lead plaintiffs and the defendants, as recognised in De Jong at [6], [24]–[27] and [50]–[52], Bray at [141]–[142], Endeavour Energy at [54]–[59] and Its Eco at [3] and [38]–[39].

On the question of impecuniosity (r 42.21(1A)(c) of the UCPR), it is not in dispute that Laith & Fadi is impecunious, with no assets of any sort to meet an adverse costs order should it be made against the lead plaintiffs in these proceedings. Although the evidence of the financial position of Mr Hana is problematic (about which I say more below), it would appear that he is also impecunious in the relevant sense that the evidence does not reveal that he could meet an adverse costs order in favour of all of the defendants. Applying De Jong at [26], Abbott at [14] and Its Eco at [3], the relevant impecuniosity of both Laith & Fadi and Mr Hana is a significant factor in favour of awarding security to the defendants on their applications.

The lead plaintiffs argue that because Mr Hana is suing in his own capacity and by being a party to the proceedings has already exposed his assets to an adverse costs order, I should treat him in the same way as I would an impecunious plaintiff suing in non-representative proceedings where the longstanding general rule is that security for costs would not be ordered, as recognised in De Jong at [24]. I reject that submission because Mr Hana is not suing in his own capacity alone but is suing for the benefit of others in proceedings which involve more than just his interests. As stated in De Jong at [24], there is an exception to the general rule where the impecunious plaintiff is suing for the benefit of others. Further, these proceedings are already more complex, more factually involved and therefore more costly than would be proceedings in which Mr Hana might be suing in his own interests alone, in keeping with the usual experience of costs increasing in representative proceedings as observed in Its Eco at [3]. The fact that the lead plaintiffs’ evidence extends to affidavits provided by other Group Members and deals with the franchises beyond those in which Laith & Fadi and Mr Hana had an interest amply demonstrates that fact. I simply cannot ignore the important consideration that Mr Hana is suing for the benefit of others, the costs which will be incurred in the proceedings by the defendants will significantly increase and the Group Members will be immune from costs orders being made against them by reason of the operation of s 181 of the CPA, which will result in potential injustice to the defendants.

It was submitted by the lead plaintiffs that their impecuniosity was caused by the conduct of the defendants (r 42.21(1A)(d) of the UCPR). But that submission fails at the outset because, applying the matters stated in Broadway Plaza at [196], the lead plaintiffs did not provide any evidence of a causal connection between the impecuniosity and the defendants’ conduct to substantiate that claim. In particular, the lead plaintiffs did not provide any evidence of their respective financial positions prior to the alleged wrongdoing of the defendants, a matter of particular relevance to the causal connection that the lead plaintiffs were required to establish to make good their submission, as referred to in Ingot Capital at [96].

The applications for security were brought in a timely fashion by the defendants (r 42.21(1A)(l) of the UCPR) at a point in time when previous security had already been provided by the lead plaintiffs on a consensual basis, in light of the fact that Galactic was funding the proceedings pursuant to the Funding Agreement. Initially, the applications were only contested by the lead plaintiffs on the basis of the quantum of security sought in each application. But once the Funding Agreement was terminated on 22 April 2024, the contest over the applications for security widened considerably to encompass the much broader considerations with which I am dealing in this judgment.

The issue of the termination of the Funding Agreement is also relevant to my discretion in the present case. Like the circumstances in Flip Out, the lead plaintiffs had funding for these proceedings until Galactic terminated the Funding Agreement. To that point, the defendants had received security for costs in their favour by consent of the lead plaintiffs and therefore were not at risk of not being able to recover costs if they successfully defended the proceedings. The termination of the Funding Agreement by Galactic was entirely unrelated to any conduct of the defendants and expressed by Galactic to be based on material breaches by the lead plaintiffs, although I make no finding that that was in fact the case. The termination of the Funding Agreement now puts the defendants at risk of not receiving their costs if further security is not ordered. Such an outcome would be unjust to the defendants. The absence of funding for the lead plaintiffs strongly favours the awarding of security in the defendants’ favour, applying the considerations set out in Flip Out at [7], [77] and [79].

All of the parties raised the issue of the prospects of success or the merits of the proceedings and their genuineness (r 42.21(1A)(a) and (b) of the UCPR) as operating in their favour in the exercise of discretion. I have considered all of the matters raised by each of the parties on their respective prospects and have concluded that none of them operates to tip the balance in one direction or the other, in relation to the discretion whether to order security, but are neutral. It is not necessary for me to embark on a detailed examination of those prospects but they are relevant, as emphasised in Live Board Holdings at [102]. I consider the claims which are made are regular on their face. There are undoubtedly pleading issues with the expression of the lead plaintiffs’ claims of knowing involvement against Mr Dresner, Mr Seskin and Lazarus Legal in the commercial list statement (and the proposed amended commercial list statement), but I consider that they are not ones which are incapable of cure. The best that can be said at this stage is that the lead plaintiffs appear to have a reasonably arguable case against the defendants, but that the outcome of the proceedings is impossible to predict, even in the broadest way.

I now turn to the substantive issue raised by the lead plaintiffs that their claims are likely to be stultified if I make an order for security for costs in favour of the defendants (r 42.21(1A)(f) of the UCPR). Stultification of genuine claims would work an injustice on the plaintiffs. There are multiple relevant considerations in assessing that issue but it is abundantly clear that the lead plaintiffs bear the onus of establishing stultification and must do so by demonstrating with candid evidence that those who stand behind the lead plaintiffs and stand to benefit from the litigation if it is successful lack the financial ability, rather than mere unwillingness, to provide the security: De Jong at [26], Dae Boong at [23]–[27], LRSM at [36]–[37], Live Board Holdings at [90] and Carrano Investment at [12].

I have concluded that the lead plaintiffs did not lead sufficient evidence to demonstrate stultification of their claims. These evidentiary failures are numerous.

First, there was no evidence at all about the financial position of Mr Youssef, the other 50% shareholder of Laith & Fadi, with Mr Hana, who stands to benefit from success in these proceedings by the lead plaintiffs. Instead, there is evidence that unsuccessful attempts to contact Mr Youssef were made by telephone in June and September 2024. Those attempts are unsatisfactory, particularly in light of the fact that Mr Youssef is mentioned in the commercial list statement as a person who relied on representations made by the franchisor and has made an affidavit on which the lead plaintiffs intend to rely at the final hearing of the proceedings. No explanation is given as to why an email or a letter has not been sent to Mr Youssef to request details of his financial position or a visit made to his home or his workplace to do the same. Mr Hana is a 50% shareholder in Laith & Fadi with Mr Youssef, yet it appears that no attempt has been made by Mr Hana to contact him.

Secondly, there are multiple glaring omissions about the financial position of Mr Hana, which appears to be intricately tied to the financial positions of House of Finance Aus and House of Finance Group and the numerous SPVs which have been established to enable him to make property investments. On these applications, the full financial position of Mr Hana is opaque and incomplete. The hearsay assertions which are made about his financial position are not matched with documents which would enable a full objective analysis of it to be undertaken. In particular, there are no financial statements of House of Finance Group or House of Finance Aus in evidence to establish their financial positions, there is no expert evidence which would enable a valuation of Mr Hana’s interests in House of Finance Group or House of Finance Aus to be made, there are no statements of any bank accounts held by Mr Hana in evidence, there are no income tax assessment documents either side of the 2023 financial year in evidence, and the returns which have been made by Mr Hana from the property investments of the SPVs are not in evidence. The fact that Mr Hana was not completely candid in detailing his financial position and it was left to the defendants to discover various properties which he had bought and sold but had not disclosed in evidence on these applications is not to his advantage. In applications such as these where stultification is central to the basis on which the lead plaintiffs resist an order for security, there is no place for the vague and convoluted evidence on the topic of Mr Hana’s financial position which was presented.

Thirdly, as I have indicated above, I attach very little weight to the unsatisfactory evidence given about the financial positions of each of the Group Members, particularly in light of the fact that they are a closed class of 48 (16 of which are corporations, being the Franchisee Group Members) across 17 franchises, can all be readily identified and are not so numerous as to make the task of marshalling evidence about the financial position of each of them an onerous undertaking. There is no transparency in the questions that they were asked that gave rise to the hearsay assertions in evidence. There is no documentary evidence to support any of the hearsay assertions given on behalf of those Group Members for whom financial details were given. There are only financial details given for 25 of the 48 Group Members, with nothing provided in relation to the balance.

When a case for stultification of the lead plaintiffs’ claims is submitted, I cannot be put in a position of being left to guess whether the identified people who will benefit from the litigation are of financial means or not. Yet the lead plaintiffs have done precisely that by their failure to provide the evidence required to make out a case for stultification. The lead plaintiffs have failed to meet their onus. On the evidence that the lead plaintiffs have chosen to present, I am not satisfied that the lead plaintiffs have proved that their claims are likely to be stultified.

I note that none of Mr Hana, Mr Youssef or any of the Group Members has given a personal undertaking to pay the costs of the defendants in the event that an adverse costs order is made against the lead plaintiffs. Applying the principle in Jazabas at [32] and [91], this failure is a further factor which tends in favour of ordering security for the defendants’ costs.

In relation to the issue of the ATE insurance, as I have found above, I am satisfied that the lead plaintiffs have demonstrated that the prospects of them obtaining ATE insurance in these proceedings is remote. I do not consider the failure to obtain ATE insurance to be a basis on which the lead plaintiffs could be criticised or a factor weighing in the discretion against them.

Much was made by the defendants of the likelihood that the lead plaintiffs’ claims will be stultified in any event because the evidence does not reveal that Levitt Robinson and the lead plaintiffs have agreed that Levitt Robinson will charge the lead plaintiffs on a speculative basis and, even if the terms of the Conditional Costs Agreement are assumed to be agreed and Levitt Robinson will charge on a speculative basis, the lead plaintiffs are required to fund at least $300,000 for disbursements. The evidence put forward by the lead plaintiffs about the basis on which they will be charged fees and disbursements by Levitt Robinson is exceptionally unsatisfactory because the Conditional Costs Agreement has not been signed by the lead plaintiffs, as it must be in accordance with s 181(3)(a) of the LPUL, and the lead plaintiffs have not proved the basis on which they have been charging fees and disbursements to the plaintiffs before the termination of the Funding Agreement. In any event, even if Levitt Robinson are charging on a speculative basis, in accordance with the principle in De Jong at [27], they will not be considered as persons standing behind the lead plaintiffs who will benefit if the proceedings are successful. I am simply not able to reach a conclusion about whether the lead plaintiffs will be able to fund their own legal costs in the proceedings.

Submissions were also directed to the suggestion that there is evidence that Galactic will seek commission if there is a successful outcome of the proceedings for the plaintiffs and therefore Galactic is also a party which stands to benefit if that eventuates. I am not satisfied that Galactic is entitled to such commission but even if I were so satisfied I do not know what I would make of this factor in relation to the discretion for ordering security.

In circumstances where the lead plaintiffs accept that they are unable to meet an adverse costs order, they are suing for the benefit of others and I am unable to make a finding of the inability, rather than the unwillingness, of Mr Hana, Mr Youssef and the Group Members to contribute towards an order for security, I consider that the risk of injustice to the defendants in incurring substantial costs without having appropriate security for those costs outweighs all other considerations relevant to the exercise of my discretion.

I consider that it is not appropriate to refer the determination of quantum of the security for costs I propose to order to a referee as this will contribute to greater delay and costs in determining this issue.

I am of the view that it is appropriate to determine the quantum of the security on each of the defendants’ applications in turn, noting that the parties do not contest the legal principles I am to apply to that task.

I have endeavoured to deal with the quantum of the security to be ordered in each application by recognising that there will be distinct phases of the proceedings in which the defendants will incur categories of costs for which the security should be provided in advance. This approach reflects the balancing of justice to the lead plaintiffs by them not having to pay security for the totality of the proceedings well in advance of them concluding, while also ensuring that the recovery of the defendants’ costs is protected before they commence to incur them on each phase.

In Louise Haselhurst v Toyota Motor Corporation Australia Ltd t/as Toyota Australia [2020] NSWSC 1607, Sackar J at [12]–[19] helpfully summarised the relevant principles to be applied in determining the quantum of security for costs, stating as follows:

The lead plaintiffs, Fogo Brazilia and Mr Dresner agreed on the amount of $110,000 to be paid as security for costs up to the close of pleadings, which was paid into court by the lead plaintiffs on 23 March 2022.

At the hearing of this application, the lead plaintiffs have agreed with the quantum sought by Fogo Brazilia and Mr Dresner in relation to several categories of costs and on the application of a 30% reduction to be applied on all actual costs to arrive at a party/party amount, but other categories of costs are in dispute between them. I have made my calculations based on a 30% deduction.

In making my calculations there appears to be discrepancies in the calculations made by Fogo Brazilia and Mr Dresner and the lead plaintiffs in arriving at their respective total costs with a 30% deduction submitted in this application. Fogo Brazilia and Mr Dresner submitted that their total costs with a 30% deduction are $1,549,993.52, but my calculation of the amounts submitted by Fogo Brazilia and Mr Dresner for their total costs with a 30% deduction is $1,581,581.02 (as set out in the table below). The lead plaintiffs submitted that Fogo Brazilia and Mr Dresner’s costs with a 30% deduction are $700,000.00, but my calculation of the amounts submitted by the lead plaintiffs for Fogo Brazilia and Mr Dresner’s total costs with a 30% deduction is $672,911.68 (as set out in the table below).

The respective positions of the parties on the categories of costs which are agreed and disputed using a 30% deduction and correcting the discrepancies in the calculations submitted by Fogo Brazilia and Mr Dresner and the lead plaintiffs are set out in the table below:

On the calculations of the amounts containing the 30% reduction put forward by Fogo Brazilia and Mr Dresner, it would appear that their total actual costs are $2,214,276.46. On the amounts using the 30% deduction, the difference between Fogo Brazilia and Mr Dresner’s total costs as submitted by them and calculated by me compared to Fogo Brazilia and Mr Dresner’s total costs as submitted by the lead plaintiffs and calculated by me is $908,669.34 (approximately $900,000.00).

The manner in which the parties have approached the calculation of the costs for each different stage of the proceedings is the antithesis of the approach I am required to take. I am not required to deal with granular arguments or with lengthy supporting evidence, as though I am dealing with an assessment of the estimated costs. The matters raised include such things as the number of pages of evidence served by the lead plaintiffs, the reduction of small cost items, very small differences on modest items, whether the defendants need to review the evidence served by other defendants and respond to it, who would engage the joint expert, the degree of preparation required for the trial and the likely length of the trial.

To the extent that there are matters on which I have made a determination, my findings are:

On my broad brush assessment of the points raised by the lead plaintiffs and the feel of the relevant circumstances of the case, most of them cannot be sustained. Based on those points made by the lead plaintiffs which I favour, I consider that the costs of Fogo Brazilia and Mr Dresner for which security should be ordered ought to be reduced from $1,581,581.02 to $1.3 million, a reduction of about $280,000.00, which is less than the approximately $900,000.00 reduction on the amounts contended for by the lead plaintiffs.

I propose to order that the amount of $1.3 million be paid in instalments in advance of major milestones to be met by the defendants to ameliorate the financial impact on the lead plaintiffs. The major milestones for the payment of these instalments would appear to be the review of all lay evidence and the responses of Fogo Brazilia and Mr Dresner to that evidence, the review and the preparation of all expert evidence and the preparation for and conduct of the trial. The amounts of each payment for those milestones based on the percentages expressed below should be:

The lead plaintiffs and Mr Seskin agreed on the amount of $50,000 to be paid as security for costs up to the close of pleadings, which was paid into court by the lead plaintiffs on 24 June 2022.

At the hearing of this application, the lead plaintiffs did not agree with the quantum sought by Mr Seskin in relation to any of the categories of costs but did agree on the application of a 33% deduction to be applied on all actual costs to arrive at a party/party amount. I have made my calculations based on a 33% deduction for each category.

In making my calculations, I discovered discrepancies in the calculations made by Mr Seskin and the lead plaintiffs in arriving at their respective total costs with a 33% deduction submitted in this application. Mr Seskin submitted that his total costs with a 33% deduction are $956,000.00 but my calculation of the amounts put forward by Mr Seskin for his total costs with a 33% deduction is $907,118.11 (as set out in the table below). The lead plaintiffs submitted that Mr Seskin’s costs with a 33% deduction are $486,500.00 but my calculation of the amounts submitted by the lead plaintiffs for Mr Seskin’s total costs with a 33% deduction is $386,913.28 (as set out in the table below).

The respective positions of the parties on the categories of costs, all of which are disputed, using a 33% deduction and correcting the discrepancies in the calculations submitted by Mr Seskin and the lead plaintiffs are set out in the table below:

On the calculations of the amounts containing the 33% reduction put forward by Mr Seskin, it would appear that his total actual costs are $1,426,980.43. On the amounts using the 33% deduction, the difference between Mr Seskin’s total costs as submitted by him and calculated by me compared to Mr Seskin’s total costs as submitted by the lead plaintiffs and calculated by me is $520,204.84 (approximately $520,000.00).

As in the case of the submissions made in respect of the costs of Fogo Brazilia and Mr Dresner, the approach of the parties to the calculation of the quantum of security that should be ordered for the costs of Mr Seskin are at a level of detail which does not reflect the task I must undertake.

To the extent that there are matters on which I have made a determination, my findings are:

On my broad brush assessment of the points raised by the lead plaintiffs and the feel of the relevant circumstances of the case, none of them can be sustained. I consider that the costs of Mr Seskin for which security should be ordered ought to be reduced to $900,000, a minimal reduction of $7,118.11, which is significantly less than the approximately $520,204.84 reduction on the amounts contended for by the lead plaintiffs.

I will adopt the same approach to the payment of the security in advance of major milestones and the percentages that I have outlined above in respect of the security to be ordered for Fogo Brazilia and Mr Dresner. As a result, the amounts of each payment for those milestones based on the percentages expressed below should be:

The lead plaintiffs and Lazarus Legal agreed on the amount of $20,000 to be paid as security for costs up to the close of pleadings, which was paid into court by the lead plaintiffs in April 2022.

At the hearing of this application, the lead plaintiffs did not agree with the quantum sought by Lazarus Legal in relation to any of the categories of costs, but did appear to agree on the application of a 30% reduction to be applied on all actual costs to arrive at a party/party amount. I have made my calculations based on a 30% reduction.

In making my calculations, I discovered discrepancies in the calculations made by Lazarus Legal and the lead plaintiffs in arriving at their respective total costs with a 30% deduction submitted in this application. Lazarus Legal submitted that their total costs with a 30% deduction are $887,591.50 but my calculation of the amounts put forward by Lazarus Legal for their total costs with a 30% deduction is $719,971.70 (as set out in the table below). The lead plaintiffs submitted that Mr Lazarus Legal’s costs with a 30% deduction are $462,700 but my calculation of the amounts submitted by the lead plaintiffs for Lazarus Legal’s total costs with a 30% deduction is $335,105.40 (as set out in the table below).

The respective positions of the parties on the categories of costs, all of which are disputed, using a 30% deduction are set out in the table below:

On the calculations of the amounts without the 30% reduction put forward by Lazarus Legal, it appears their total actual costs are $1,028,531.00. On the amounts using the 30% deduction, the difference between Lazarus Legal’s total costs as submitted by them and calculated by me compared to Lazarus Legal’s total costs as submitted by the lead plaintiffs and calculated by me is $384,866.30 (approximately $385,000.00).

As in the case of the submissions made in respect of the costs of Fogo Brazilia, Mr Dresner and Mr Seskin, the approach of the parties to the calculation of the quantum of security that should be ordered for the costs of Lazarus Legal are at a level of detail which does not reflect the task I must undertake.

To the extent that there are matters on which I have made a determination, my findings are:

On my broad brush assessment of the points raised by the lead plaintiffs and the feel of the relevant circumstances of the case, all of them cannot be sustained. I consider that the costs of Lazarus Legal for which security should be ordered ought to be reduced from approximately $719,971.70 to $700,000, a reduction of $19,971.70, which is less than the approximately $384,866.30 reduction contended for by the lead plaintiffs.

I will adopt the same approach to the payment of the security in advance of major milestones and the percentages that I have outlined above in respect of the security to be ordered for Fogo Brazilia, Mr Dresner and Mr Seskin. As a result, the amounts of each payment for those milestones based on the percentages expressed below should be:

For the reasons set out above, I propose to make the following orders: