Resilium Pty Ltd v Nest Insurance Consult Pty Ltd

1. [1]

   By Notice of Motion filed on 28 June 2021 the cross-defendants, Resilium Insurance Broking Pty Ltd (“RIB”) and Resilium Pty Ltd, seek security for the costs of the cross-claim brought against them by Nest Insurance Consult Pty Ltd in the sum of $456,000.

Background

1. [2]

   Resilium is the sole shareholder of RIB. Resilium and RIB (the “Resilium Parties”) operate a large independent authorised insurance broker and adviser network around Australia. Each of the Resilium Parties holds an Australian Financial Services License.

2. [3]

   The businesses of the Resilium Parties involve appointing insurance brokers as authorised representatives. In return for the use of the Resilium Parties’ Australian Financial Services Licenses, the authorised representatives pay to the relevant Resilium entity a fee and commission on insurance premiums written by the authorised representatives.

3. [4]

   Nest was formerly an authorised representative of both Resilium Parties.

4. [5]

   The contractual relationship between the Resilium Parties and Nest comprised:

5. [6]

   Resilium terminated the Referral and Allocation Agreement in late 2019. Nest contends that this termination was wrongful.

6. [7]

   RIB terminated the 2020 Corporate Authorised Representative Agreement on 19 November 2020. The basis on which RIB terminated that agreement was that the relevant insurer under motor vehicle policies had identified approximately 40 instances where the garaged address nominated for the motor vehicle proposed to be insured was wrongly stated to be a country area as opposed to a metropolitan area. Evidently, the insurer was of the view that the postcode was deliberately misstated so as to lower the likely premium. The parties referred to this as the “Postcode Issue”. Notwithstanding the existence of the Postcode Issue, Nest does not contend in these proceedings that RIB’s termination of the 2020 Corporate Authorised Representative Agreement was wrongful.

The cross-claim

1. [8]

   By its cross-claim Nest alleges that:

2. [9]

   This loss is particularised as follows:

3. [10]

   Nest also alleges that the Resilium Parties engaged in misleading or deceptive conduct for the purposes of s 18 of the Competition and Consumer Act 2010 (Cth), Sch 2 – Australian Consumer Law by representing to Nest that the entities receiving its insurance broking services using the Resilium Parties’ Australian Financial Services License “were the clients or customers of Nest” (“the Customer Representations”). Nest alleges that, but for the making of these representations, it would not have entered the relevant agreements with the Resilium Parties and that it has thereby suffered loss and damage. Thus, Nest seeks to make out a “no transaction” case arising out of the allegedly misleading or deceptive conduct contended for.

4. [11]

   Nest also makes separate claims for unpaid commissions and fees (in the order of $180,000) and for monies it contends it mistakenly paid to Resilium following termination of the Referral and Allocation Agreement in 2019 (in the order of $90,000).

Test

1. [12]

   There is no dispute that the matter for consideration is whether “it appears by credible testimony that there is reason to believe that [Nest] will be unable to pay the costs of [the Resilium Parties] if [the Resilium Parties were to be] successful in…its defence”. [1]

2. [13]

   A conclusion that a company “will be unable to pay” the costs within the meaning of this test may be available if it could only do so if given an extended time to realise its assets. [2]

3. [14]

   In order to assess whether Nest “will be unable to pay” the Resilium Parties’ costs were Nest to be unsuccessful, an assessment must be made as to what the Resilium Parties’ costs are likely to be. The Resilium Parties have the onus of adducing material to enable the court to estimate what their costs are likely to be. What is required is the establishment of a defensible and not too vague estimate of those likely costs. [3]

4. [15]

   The relevant principles were recently and succinctly summarised by Macaulay J in Andrianakis v Uber Technologies (Ruling No 1) as follows: [4]

Resilium’s likely costs of the proceedings

1. [16]

   Resilium’s solicitor, Mr Christiaan Roberts, has prepared a detailed estimate of the costs the Resilium Parties will incur in resisting Nest’s cross-claim. Mr Roberts has prepared a detailed four-page schedule called “Litigation Costs Estimator” in which he sets out under the headings “Pleadings”, “Security for costs”, “Discovery”, “Gathering and Preparation of Evidence”, “Consideration of Evidence”, “Joint expert report”, “Settlement Considerations”, “Directions Hearings”, “Preparation for Hearing”, “Hearing” and “Judgment” the steps that he estimates he and senior and junior counsel will take and the costs that will thereby be incurred.

2. [17]

   There is thus no suggestion that Mr Roberts has adopted some kind of “broad brush” approach to the task. He has conducted a very detailed analysis.

3. [18]

   The criticism offered of Mr Roberts’ estimate is that it proceeds on assumptions which overstate the likely complexity of the proceedings, the number of witnesses likely to be called and the likely length of the hearing.

4. [19]

   As to the complexity of the proceedings, Mr Gray, who appeared for Nest, pointed to the fact that Nest has now made clear it does not contend that RIB’s termination of the 2020 Corporate Authorised Representative Agreement was wrongful and submitted that therefore the Postcode Issue will not loom large in the proceedings.

5. [20]

   However, Mr Elliott SC, who appeared with Mr Ratnam for the Resilium Parties, submitted that the Postcode Issue will or at least may be relevant to:

6. [21]

   It thus seems likely that time will be spent at the hearing exploring the Postcode Issue.

7. [22]

   Mr Roberts explained that Resilium will call three of its officers to give evidence about the Postcode Issue and will also call two other lay witnesses, including, one from the broker to whom Nest claims Resilium has passed on the Client Portfolio, to which I have referred.

8. [23]

   Nest will have to adduce accounting evidence to prove its damages claim.

9. [24]

   The argument before me proceeded on the presumption that a single expert will be appointed. There is some dispute as to the costs of that expert. Mr Roberts’ estimate, of which the Resilium Parties’ share will likely be in the order of $80,000, does not strike me as unreasonable.

10. [25]

    It also appears likely that considerable time and expense will be involved in obtaining from Nest the financial information needed to deal with the damages claim and briefing the expert.

11. [26]

    As to the likely length of the hearing, Mr Roberts’ estimate is of a five day hearing whereas Nest’s solicitor, Ms Monique Carroll estimates a two and a half day hearing. Having regard to the likely issues, five days seems to me to be more likely.

12. [27]

    Particular criticisms were made of some of Mr Roberts’ particular estimates.

13. [28]

    One was the suggestion that the Resilium Parties were not justified in briefing senior counsel in the proceedings. I do not accept that submission. The claim is substantial and the involvement of senior counsel is appropriate.

14. [29]

    Criticisms were also offered as to the time Mr Roberts estimated will be required to confer with witnesses and prepare witness statements. Mr Roberts estimated that 10 hours would be required for each witness. That may be a generous allowance but no less realistic than Nest’s solicitor’s estimate of a mere 30 minutes for each witness.

15. [30]

    Another criticism was that Mr Roberts allowed a 15% “loading” to, in effect, cater for contingencies and unforeseeable circumstances apt to increase costs. If this application is any guide, Mr Roberts’ allowance of such a loading is, if anything, conservative.

16. [31]

    Mr Roberts made five affidavits in support of the Resilium Parties’ position for this application and Ms Carroll made four in response. The parties exchanged numerous Notices to Produce leading up the hearing that, despite Mr Roberts’ estimate of a “half day”, took the better part of a full day.

17. [32]

    Overall, I find Mr Roberts’ analysis to be detailed and thoughtful and very likely to reflect an amount closely approximating the costs that the Resilium Parties would likely recover, were they to be successful.

Nest’s financial position

1. [33]

   As I have said, the only director of Nest is Mr Nguyen.

2. [34]

   Mr Nguyen’s wife, Ms Alice Lei, is the only shareholder in Nest. Ms Lei holds her shareholding as trustee for the Jako on Balfour Family Trust (“Jako Trust”), to which I will return.

3. [35]

   Ms Carroll has deposed, on information and belief from Mr Nguyen, that “Nest is in the business of providing services in the insurance broking industry and competes with the Resilium Parties in doing so”.

4. [36]

   In a position paper prepared for Nest in relation to an issue that is no longer relevant, it is stated that “one of the services Nest provides is ‘back office’ support to another authorised insurance broker”.

5. [37]

   Evidently, that other “authorised insurance broker” is Postcode Insurance Consult Pty Ltd [6] , a company registered on 30 November 2020 (immediately after RIB terminated the Corporate Authorised Representative Agreement). Mr Nguyen was, but is no longer, a director of that company. Ms Lei is its only shareholder. It has the same place of business as Nest.

6. [38]

   Nest’s accounts for FY21 include a profit and loss account that shows a net loss of $52,560.

7. [39]

   Nest’s balance sheet as at FY21 shows that it has net assets of $925,433, of which $805,275 comprises non-current assets represented by two loans. One is described “Loan-Jaspoli” of $391,595 and the other is described as “Shareholders Accounts” of $413,680.

8. [40]

   It is thus clear that the only means by which Nest could meet any costs order in these proceedings would be by calling up these loans.

9. [41]

   Jaspoli Pty Ltd is the trustee of the Jaspoli Trust. Mr Nguyen is the sole director of Jaspoli and is also an appointor under the Jaspoli Trust.

10. [42]

    The loan made by Nest to Jaspoli was used to assist Jaspoli’s purchase of a property in South Melbourne.

11. [43]

    As Jaspoli is the trustee of the Jaspoli Trust, I infer that the South Melbourne property is trust property.

12. [44]

    In addition to the loan from Nest, Jaspoli funded the purchase of the South Melbourne property with a loan from Westpac, which has now been refinanced by ANZ. The amount now owing by Jaspoli to ANZ is $1,147,723.

13. [45]

    I infer that Jaspoli had granted ANZ a mortgage over the South Melbourne property to secure the advances. There is no evidence as to whether Nest also has security over the South Melbourne property. In the absence of any such evidence, I am not prepared to infer that it does.

14. [46]

    Jaspoli’s profit sheet for FY21 shows that it made a profit of $26,830 which is noted as an unpaid distribution to Mr Nguyen.

15. [47]

    Jaspoli’s balance sheet shows that it has net assets of $20.

16. [48]

    Jaspoli’s financial statements thus show that were Nest to call on it to repay its loan, Jaspoli would have to sell the South Melbourne property.

17. [49]

    There is no evidence before me as to whether that property is readily saleable or as to the time it would take to realise the property so as to make available the funds to repay the loan to Nest.

18. [50]

    In any event, the proceeds of sale would, presumably, form part of trust property. There is no evidence before me as to the basis on which the trust operates. Nor is there any evidence who the beneficiaries of the trust are.

19. [51]

    On the basis of this evidence, I am not able to draw any conclusion as to when and how Jaspoli would be able to respond to a demand by Nest for repayment of the loan amount. For the purpose of assessing whether, for the purposes of this application, there is reason to believe Nest will be unable to pay any costs order obtained by the Resilium Parties, I cannot see what weight can be given to the Jaspoli loan.

20. [52]

    The amount owing to Nest on account of the “Shareholders Accounts” is owed by Ms Lei as trustee for the Jako Trust.

21. [53]

    In relation to that loan, Ms Carroll deposed:

22. [54]

    This paragraph did not reveal that Ms Lei held the funds as trustee for the Jako Trust.

23. [55]

    The Resilium Parties then issued a Notice to Produce calling for documents evidencing that the funds to which Ms Carroll referred were still held by Ms Lei.

24. [56]

    On the day before the hearing of this motion, a large number of documents were produced in response to that Notice to Produce. Those documents included a statement from a mortgage offset account in the name of Mr Nguyen and Ms Lei with ANZ. The documents showed that the current balance of Mr Nguyen and Ms Lei’s home loan with the ANZ (secured over their property in Doncaster in Melbourne, to which I will return) is some $587,000 and that “Available Funds” in that account were some $275,000.

25. [57]

    That led to Ms Carroll making a further affidavit in which she said:

26. [58]

    This further evidence showed that the statement that Ms Carroll had made, on information and belief from Mr Nguyen and Mr Hubbard as to the location of the $413,680 was not correct and was quite misleading.

27. [59]

    The “loaned monies” did not “remain” in the relevant bank account. Some $141,000 of the loan represented by the Shareholders Accounts is unaccounted for.

28. [60]

    I find it hard to accept that Mr Nguyen did not know the true position when he gave Ms Carroll the instructions that led to her deposition set out at [53] above.

29. [61]

    I also find unsatisfactory the manner in which Ms Carroll clarified matters as set out at [57]. This occurred only after service of the Resilium Parties’ notice to produce revealed the mortgage offset account. I infer that Ms Carroll made the further statement at [57] also on information and belief from Mr Nguyen. To deal with the matter as if it was simply clearing up a typographical slip, when in fact it was changing the substance of the matter, was inappropriate.

30. [62]

    I find these matters relevant to what weight I should give to the undertakings proffered on behalf of Nest, to which I will return.

31. [63]

    No financial statement of the Jako Trust was produced in response to the Resilium Parties’ Notice to Produce. Thus, the status of the $275,000 in Mr Nguyen and Ms Lei’s ANZ Mortgage Offset Account is unexplained. Evidently, Ms Lei, as trustee of the Jako Trust, has on lent the funds to Mr Nguyen and herself so that the funds could be deposited in the ANZ mortgage offset account and offset Mr Nguyen’s and Ms Lei’s obligation under their home loan.

32. [64]

    There is no evidence as to the terms upon which Ms Lei has so advanced the funds. They may be repayable on demand. They may be only repayable after a period of time. The matter is unexplained.

33. [65]

    Were Nest visited with a costs order in favour of the Resilium Parties, it is impossible to say what prospect Nest would have in seeking to recover its Shareholders Accounts from Ms Lei in her capacity as trustee of the Jako Trust; not least because there is no evidence as to the present location of $141,000 of those funds.

Conclusion as to Nest’s ability to pay a costs order

1. [66]

   In these circumstances, I am satisfied that there is reason to believe that Nest will be unable to meet any costs order made in favour of the Resilium Parties, particularly were the Resilium Parties’ costs to be in the order estimated by Mr Roberts.

2. [67]

   The threshold test is “low” and “undemanding”. The Resilium Parties need only demonstrate a rational basis for the requisite belief. That basis exists where the evidence, assessed with a practical and common-sense eye, reveals a real, rather than a fanciful, risk or chance that Nest will be unable to pay. [8]

3. [68]

   Here, the evidence shows that the only means whereby Nest could meet a costs order is by calling in the loans from Jaspoli and from Ms Lei.

4. [69]

   The loan from Jaspoli could not be called in until Jaspoli has sold its property in South Melbourne and only if the proceeds of sale of the property are available to meet an unsecured creditor (as I infer Nest to be). It is a matter of speculation whether Nest will be able to recover from Ms Lei the funds advanced to her.

The undertakings

1. [70]

   In alternative answer the Resilium Parties’ application for security, Mr Nguyen and Ms Lei have indicated willingness a proffer a number of undertakings to the Court.

2. [71]

   The first is a:

3. [72]

   Mr Nguyen and Ms Lei own the Doncaster property to which I have referred. There is evidence that that property is valued in the order of $1.6 million. It is encumbered by a mortgage in favour of ANZ for the amount of some $857,000 to which I have already referred.

4. [73]

   Mr Nguyen and Ms Lei have indicated a preparedness to undertake not to further encumber that property.

5. [74]

   However, Mr Nguyen and Ms Lei have not proffered evidence of their general financial position. There is no evidence of their overall asset position. It is therefore not known what other creditors might compete for such equity as Mr Nguyen and Ms Lei have in the Doncaster property.

6. [75]

   In those circumstances, it is not possible to know what value to place in the undertaking proffered.

7. [76]

   Alternatively, as far as concerns Nest’s loan to Jaspoli, Ms Carroll has deposed that:

8. [77]

   There are a number of difficulties with this undertaking.

9. [78]

   The first is that it is not clear how Mr Nguyen, as the sole director of Jaspoli (a trustee), could cause Jaspoli to “use the assets of Jaspoli to meet the debts owed to Nest”. Presumably there are beneficiaries of the Jaspoli trust whose interests Mr Nguyen would have to take into account.

10. [79]

    In any event, the difficulties associated with Jaspoli needing to realise the sale of the South Melbourne property before having funds available to repay Nest would remain.

11. [80]

    Finally, the evidence I have set out at [53] to [62] makes me very cautious about attaching weight to undertakings given on behalf of Nest.

12. [81]

    Thus, although personal undertakings as to costs can, in an appropriate case, represent a powerful consideration against ordering security for costs, [9] I do not find this to be the case here.

13. [82]

    I find this especially so in this case in circumstances where no suggestion is made on behalf of Nest that an order for security will stultify the proceedings.

Was Nest’s impecuniosity caused by Resilium’s conduct?

1. [83]

   In his written submissions, Mr Gray submitted that “any financial downfall of Nest” had been caused by Resilium’s alleged refusal to “provide Nest with access to its confidential information and [to] the use of that confidential information by the Resilium Parties”.

2. [84]

   This submission was not developed orally.

3. [85]

   If there is a link between Nest’s “financial downfall” and the Resilium Parties’ use of “confidential information”, that link may explain Nest’s current income.

4. [86]

   But I find it hard to see any connection between any conduct that could possibly be attributed to the Resilium Parties and the manner in which Nest’s balance sheet shows it has chosen to deal with its assets.

Security should be ordered

1. [87]

   In all these circumstances, I am persuaded that I should order that Nest provide security for the Resilium Parties’ costs of the cross-claim.

2. [88]

   Adopting the “broad brush” approach to which the authorities refer, assisted by Mr Roberts’ careful assessment of the likely recoverable costs the Resilium Parties are likely in fact to incur, and bearing in mind that the object of the exercise is not to provide the Resilium Parties will full protection for their estimated costs, I fix the amount of security at $400,000.

3. [89]

   Both parties suggested that, if security were to be ordered, it would be open to the Court to order that it be ordered in stages.

4. [90]

   The parties should confer and agree on the orders necessary to give effect to these reasons, including as to whether security should be ordered in stages.

5. [91]

   If agreement cannot be reached, the parties should send competing short minutes to my Associate by 5 pm on 9 August 2021.

6. [92]

   I stand the proceedings over for directions on 13 August 2021.