How Not to Bring an Application for Security for Costs

How Not to Bring an Application For Security For Costs

by Lisa Dorman | March 2007 Area of Expertise | Commercial Disputes & Insolvency

Section 1335 of the Corporations Act establishes that the defendant has the onus of showing that the plaintiff company is unlikely to satisfy an adverse costs order. An unsatisfied demand made by the defendant that the plaintiff show that it has adequate resources will not serve as to reverse the onus of proof which lies with the defendant.

Introduction A recent decision of the Federal Court of Australia makes it clear that a Court will only order a party to provide security for costs pursuant to section 1335 of the Corporations Act 2001 (the “Act”) where there is credible evidence to establish reason to believe that there is a real chance that the plaintiff will be unable to pay the costs of the defendant.

In Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA (ABN 95 101 547 424) [2007] FCA 56, Justice Finn dealt with an application by Flottwegg seeking security for costs from Olivaylle pursuant to section 1335 of the Act.

Background The substantive proceedings involved a claim filed by Olivaylle against Flottwegg seeking damages for breach of contract and relief under sections 82 and 97 of the Trade Practices Act. Prior to the security for costs application being filed, representatives for Flottwegg had corresponded with the solicitor for Olivaylle and raised a concern about whether Olivaylle would be able to meet an adverse costs order if made against it in the proceedings.

Flottwegg requested documents from Olivaylle showing its current financial position and its capacity to meet any adverse costs order. The documents sought were expected to include “statements of cash flows, profit and loss statement, current balance sheet and bank statements” .1 Olivaylle refused to provide the requested documents.

Olivaylle advised Flottwegg that Olivaylle could meet a costs order and that any application for security for costs would be resisted.

Flottwegg filed an application for security for costs pursuant to section 1335 of the Act. Two affidavits were filed in support of its application, one of which annexed the correspondence between the respective solicitors and land titles searches which revealed that the Olivaylle did not hold any property in South

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Australia but was the registered owner of a property in Victoria. A company search was also filed which showed that Olivaylle had a thousand issued shares being held by four directors and that the National Australia Bank had a fixed and floating charge over the Victorian property.

The Law Section 1335 of the Act provides: (1)

[Court may require security] Where a corporation is plaintiff in any action or any 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 for those costs and stay all proceedings until the security is given.

Flottwegg relied on the decision of FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 33 ACSR 739 suggesting this decision was authority to the extent that the legislative intent of section 1335 was that in “permitting the incorporation of a limited liability entity, it was necessary to ensure that persons who might have dealings, whether voluntary or involuntary, with such an entity should have a measure of protection from prejudice resulting from the limited liability character of a corporation”2.

The Decision Justice Finn made the following observations regarding section 1335: •

There is no onus on the plaintiff to adduce evidence of its ability to pay its debts. Rather, what is required is “that there be credible testimony before the court that there is reason to believe that the applicant will be unable to pay the respondent’s costs if the respondent is successful”3.

•

It is well accepted that the paid up capital of a company is not as a matter of course, relevant in proceedings of this variety because the capital structure itself will ordinarily be irrelevant to the ability to pay.

•

For the purpose of determining whether the threshold requirement has been met, his Honour adopted the following approach of von Doussa J in Beach Petroleum NL v Johnson (1992) 10 ACLC 525: “In my opinion, the power of the court under section 1335 arises if credible evidence establishes that there is reason to believe that there is a real chance that in events which can be fairly described as reasonably possible, the plaintiff corporation will be unable to pay the costs of the defendant upon service of the allocatur, if judgment goes against it”.

The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would then to be taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security”4.

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His Honour found that Olivaylle’s refusal to provide the information sought by Flottwegg did not suggest that Olivaylle was unable to meet an adverse costs order. There was no credible testimony before His Honour to suggest that Olivaylle did not have either assets or the capacity to accommodate an adverse costs order.

His Honour went so far to suggest that Flottwegg may have been “excessively prompt and pre-emptory” in bringing the application5.

The application for security of costs was dismissed and Flottwegg was ordered to pay Olivaylle’s costs of the application.

Endnotes 1 [2007] FCA 56 at paragraph 4.

2 Ibid paragraph 9.

3 Ibid paragraph 6.

4 Ibid paragraph 12.

5 Ibid paragraph 14.

For more information, please contact: Lisa Dorman Senior Associate T: 02 8257 5734 lisa.dorman@turkslegal.com.au

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