security-for-costs

What is Security for Costs?

When you are a defendant in a legal proceeding you might have reason to believe that the plaintiff could not pay your legal costs if you are successful.

In that case you should consider applying for an order that the plaintiff pay security for costs.

If the Court orders that security for costs be given by the plaintiff, the legal proceeding will be stayed (stopped) until the security is given.

Where the plaintiff is a corporation section 1335(1) of the Corporations Act 2001 (Cth) provides as follows:

Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.’

Section 1335 of the Corporations Act requires a balance to be struck between protecting the applicant from the possible consequences of being sued by an impecunious corporation with limited liability and avoiding injustice to the corporation by unnecessarily prejudicing it in the conduct of litigation.

In ascertaining whether there is credible testimony that there is reason to believe that the plaintiff corporation will be unable to pay the costs if it is unsuccessful, the Court is required to judge the quality of the evidence put before it to see whether the evidence objectively gives rise to a reason to believe that the corporation will be unable to pay the defendant’s costs.

Section 1335 of the Corporations Act calls for a practical, commonsense approach to the examination of the corporation’s financial affairs. It is necessary to make an assessment of the risk that the corporation will be unable to pay an assessment that will be imprecise. A ‘reason to believe’ is a low threshold test.

However, the need for credible testimony is a safeguard to ensure that the application is not founded purely upon speculation. Speculation as to insolvency or financial difficulties likely to confront the corporation will be an insufficient basis to exercise the discretion to order security for costs.

Determining whether a corporation will be unable to pay involves two considerations:

(a)     first, it is necessary to fix the time at which the plaintiff’s inability, or apprehended inability, is to be assessed. That generally requires an opinion to be formed at the time of judgment and immediately following;

(b)     second, it is necessary to identify the range of assets to which recourse might be had for the purpose of enforcing an adverse costs order. Generally, the relevant assets will be those that might be immediately realised and those which could be realised in sufficient time to enable the plaintiff to comply with a costs order in the usual terms.

Where the only tangible assets of a plaintiff corporation are held in trust and solvency depends on its right as trustee to an indemnity against the trust property, it is necessary for the court to have in mind the difficulties which a successful defendant would face in attempting to execute an order for costs.  Unless there is reason to consider to the contrary the Court will generally treat the plaintiff company as if it had no assets to meet such a liability.

Importantly, the question is not whether the plaintiff will be unable to meet an adverse costs order, but whether there is reason to believe that it will be unable to do so. The threshold is low.

If the threshold is met, the question is then whether the Court should exercise its discretion to make an order for security for costs.  In that regard the Court has a broad unfettered discretion under section 1335 of the Corporations Act.

The Courts apply the following non-exclusive list of factors in deciding whether to order security for costs:

(a)     the strength and bona fides of the plaintiff’s case;

(b)     the likelihood of the plaintiff being unable to pay the defendant’s costs;

(c)     whether the plaintiff’s impecuniosity was caused by the defendant’s conduct which is the subject of the claim;

(d)     whether the application for security is oppressive;

(e)     whether the award of security would deny an impecunious applicant a right to litigate;

(f)      whether there are persons standing behind the plaintiff who are likely to benefit from the litigation;

(g)     whether the persons standing behind the plaintiff have offered any security or personal undertaking to be liable for the costs, and if so, the form of such an undertaking;

(h)     whether the applicant is in substance a plaintiff or the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt the defendant’s self-help procedures;

(i)      whether the application for security had been brought promptly;

(j)      whether the applicant has any rights which it can exercise against assets of the plaintiff to satisfy an order for costs in its favour; and

(k)     any factors relating to the public interest.

Please contact me if you require assistance.

Greg Carter Litigation Lawyer Perth

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