Is there reason to believe that a costs order will not be able to be paid?

A security for a costs application is a serious consideration for the defendant where the plaintiff is a corporation with contingent assets.

In the decision of Aquatic Air Pty Ltd v Siewert [2016] NSWCA 130 (Court of Appeal Supreme Court New South Wales) (30 May 2016), Macfarlan JA considered a security for costs application made under s 1335 of the Corporations Act 2001 (Cth) in these circumstances.

Section 1335 (Costs) of the Corporations Act 2001 is as follows:

(1) 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. [emphasis added]

How did the court find ‘reason to believe’?

Aquatic appealed against the primary judge’s findings which were adverse to Aquatic in that Mr & Mrs Siewert were found to have made no misrepresentations and had not breached a warranty given when they sold shares in certain companies conducting aviation operations to a related company of Aquatic.

After examining the Statement of Assets and Liabilities of Aquatic which showed assets of $2,770,000 exceeding liabilities of $1,200,000, Macfarlan JA concluded that the availability of each of the assets to Aquatic was dependent upon its success on the appeal.

As a consequence, he held that Siewert had satisfied the precondition to the court exercising its power under s 1335, namely there was reason to believe that Siewert will be unable to recover their costs of the appeal from Aquatic if Aquatic failed in the appeal.

The discretionary factors in making a security for costs order

Being a decision by a judge of the Court of Appeal, the way in which the discretionary factors were weighed in this case is of general relevance. The factors were:

Security had already been provided at the first instance: The argument was that the security provided at first instance of $65,000 remained available because costs had not been assessed. The court accepted the evidence of Siewert’s solicitors which countered this in that there were unassessed costs incurred which far exceeded that figure (there were seven hearing days).

Whether the appeal would be stifled: The argument that an order for security would stifle the appeal was rejected because the strong probabilities are that the security would be provided out of the resources of Aquatic’s director.

Delay in making the application for security: The argument that the application for security had not been promptly filed was rejected because Aquatic had been put on notice that security was required when the appeal was filed. The fact that two months had elapsed before the application was made was not sufficient delay to refuse the application.

The relevance of the Siewert’s cross-appeal: The argument was that it may be unfair to allow the cross-appeal to proceed, while the appeal is stifled, was met by Siewert assuring the court that the cross-appeal would not proceed if the appeal did not proceed. Also, the fact that if the cross-appeal failed they might not obtain a costs order against Aquatic did not outweigh the real prospect that Siewert might obtain a costs order in the appeal.

Whether Aquatic’s impecuniosity was caused by Siewert: This often potent argument was of reduced significance on appeal because the defendant has the advantage of a judgment in its favour vindicating its actions. The argument was rejected because there was no evidence of causation.

Undertaking by sole director of Aquatic: The court might have accepted a personal undertaking by the director instead of security for costs, but no details were provided of the director’s assets and liabilities, which on their face were contingent in nature.

The security for costs orders made

On the one hand, Siewert estimated a two day hearing with costs of the appeal of between $93,700 and $170,900. On the other hand, Aquatic estimated a one day hearing with costs of $36,000.

The court relied upon its own assessment of the proceedings and ordered that Aquatic provide security for costs of the appeal of $80,000. Failing payment within 14 days, the appeal be stayed.

Conclusion

An application for security for costs of the appeal has good prospects of success: if the appellant is a corporation and it was not successful at the first instance, and if it can be demonstrated that the availability of the appellant’s assets to pay the respondent’s costs is contingent upon the success of the appeal.