Security for Costs – COVID-19 as a Militating Factor

Case Update: Security for Costs - the impact of Covid-19 and other recent developments

In the current economic climate, now more than ever, applications for security for costs can be of substantial strategic significance in the conduct of litigation. This article explores the discretionary factors which have been considered in a line of recent cases involving security for costs applications and impecunious corporate plaintiffs and highlight strategies that plaintiffs and their advisors may wish to be mindful of in approaching such applications.

The purpose of a security for costs order is to protect the defendant's entitlement to recover legal costs from an unsuccessful plaintiff. Depending on the jurisdiction of the proceedings, a defendant can apply for security for costs under section 1335(1) of the Corporations Act, section 56(1) of the Federal Court of Australia Act and Rule 42.21 of the Uniform Civil Procedure Rules.

Where a Court orders security, it will commonly be by way of bank guarantee, a deposit of money into Court or by way of an indemnity provided to the defendant. Generally, if a party is ordered to provide security, proceedings will be stayed until the plaintiff provides the security. If the plaintiff fails to comply with the order after a certain period, the Court may dismiss the proceedings. Considering an application for security for costs is a balancing act for the Court; weighing up the detriment faced by a defendant in potentially being unable to recover a costs order in its favour; the financial burden that security would impose on the plaintiff; and whether as a result of that burden, the litigation will be stultified.

This balancing act was recently considered by Henry J in the decision of Grocon Group Holdings Pty Limited v Infrastructure NSW [2020] NSWSC 1194.

The Proceedings

Grocon Group Holdings Pty Limited (Grocon) commenced proceedings against Infrastructure NSW (INSW) in February 2020, alleging misleading and deceptive conduct in relation to the bid process for the Central Barangaroo Development. INSW sought an order that Grocon provide security in the amount of $1,018,395.84 by way of a first tranche and a stay of the proceedings until Grocon paid security in the manner ordered by the Court.

Relevant Law

INSW had the onus of proving the threshold issue that there was reason to believe that Grocon would be unable to pay the costs of INSW if it were ordered to do so. His Honour noted that the test set a low threshold and required the Court to adopt a practical common-sense approach to the examination of Grocon's financial affairs[1]. INSW relied on Grocon's consolidated Financial Reports which showed that by 30 June 2017, the Grocon Group was in financial difficulty. In that year, Grocon Holdings made a loss and had current liabilities that exceeded current assets. His Honour found that despite being in the best position to adduce evidence in response to INSW's evidence, the Grocon parties largely chose not to do so. His Honour therefore concluded that INSW demonstrated that there was reason to believe that each of the Grocon plaintiffs would be unable to satisfy a costs order in favour of INSW.

Once the threshold question was satisfied, Grocon submitted several discretionary reasons why INSW's motion for security should be refused, including:

1. Impact of COVID-19 as a factor

His Honour found that the effect of the COVID-19 pandemic on the financial position of Grocon might have militated against an order for security for costs if Grocon's evidence had addressed the relevant issue and specifically identified what impact it had on its financial position[2].

His Honour distinguished Grocon from the recent decision of Burley J in Hardingham v RP Data Pty Limited[3] where evidence was provided by Hardingham that his business was significantly disrupted as a consequence of the COVID-19 pandemic. In that case, security for costs was not ordered. The plaintiff adduced evidence that if an order for security was made, he would have no alternative but to place his company in liquidation and to personally apply for bankruptcy. Furthermore, there was evidence led that there was little prospect for creditor funding if the company went into liquidation given the nature of the business, that is, a real estate marketing company.

1. Stultification

Grocon submitted that an order for security would stultify or frustrate the proceedings as Grocon would not have the funds to satisfy such order. His Honour accepted that stultification was a powerful factor weighing against the making of a security for costs order[4] but that the onus was on Grocon to prove that not only would it become impecunious, but that those who stood behind the company were unable and not merely unwilling to provide security for costs. Grocon did not lead evidence as to the financial position of those standing behind the company or evidence that it had sought, but had not been able to, obtain finance or litigation funding. In addition, there was no evidence explaining why commercial litigation funding was either unavailable or inappropriate[5].

Similarly, in the decision of All Class Insurance Brokers Pty Ltd (In Liq) v Chubb Insurance Australia Ltd[6] Allsop CJ referred to the notion that 'those who stand to share the benefits of litigation cannot shirk its burdens'[7] and that, when considering whether litigation would be stultified, the Court would consider who stood to benefit from the proceedings if the plaintiff were successful. The Court found that in the absence of evidence to the contrary, there were four creditors of the plaintiff who had the ability to provide funding and there was no reason to conclude that an order for security would stifle the litigation.

Conclusion

In Grocon, his Honour found that the discretionary factors weighed in favour of INSW; and the making of an order for security would not stultify the proceedings. On that basis, Grocon was ordered to pay security for costs.

Key Takeaways

An order for security for costs is based on the particular facts of the proceedings and is an exercise in discretion. It is therefore important to put all relevant evidence before the Court for consideration. When it comes to defending an application for security for costs on the ground of stultification, it is important that the plaintiff prove not only that it is without means to satisfy the security, but it should also clearly establish that those who stand behind the plaintiff and who will benefit from the litigation if it is successful are also without means. In addition, it is prudent for a plaintiff who wishes to raise an argument of stultification in response to an application for security for costs to take steps to seek commercial litigation funding and if it is not obtained, to be able to provide evidence explaining why such funding was either unavailable or inappropriate.

[1]Wollongong Coal Limited v Gujarat NRE Properties Pty Limited [2019] NSWSC 187 at [19]

[2] Grocon at [134]

[3] [2019] FCA 2075

[4]Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542.

[5]Duke Holdings (in Liq) v Duke Group Limited (in Liq) [2009] SASC 245

[6] [2020] FCA 840,

[7]Australian Equity Investors, An Arizona Limited Partnership v Colliers International (NSW) Pty Ltd [2012] FCAFC 57at [30[.

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