//
© 2026 Zoe. All rights reserved.
Zoe is a legal information platform. Always consult the Federal Register of Legislation for authoritative text.
[2026] NSWCA 157
respondent. Leave to appeal refused in relation to grounds 1, 2 and 3 to 6; leave granted in relation to ground 2A; appeal dismissed; appellant to pay respondent’s costs.
The Court of Appeal held that the SOP Act did not shield Alliance from having its unpaid adjudication judgment considered in a security for costs application. The relevant fact was that the judgment remained unpaid, not that it originated in an adjudication. The primary judge had given adequate reasons for finding the low, preliminary threshold for security satisfied. The appeal was dismissed, although leave to appeal was granted on the statutory interpretation point because a prior District Court decision had taken the opposite view.
AI-generated legal information, not legal advice. Zoe can make mistakes. Check the cited source, and for advice about your situation consult a qualified Australian lawyer.
9 cited instruments linked from this judgment.
2,560 words · generated 05/10/2026
Alliance Living Pty Ltd was a building contractor engaged by Pallas Development Management Pty Ltd to carry out work at a commercial property in Double Bay. Alliance subcontracted aluminium glazing, cladding, louvres and related fabrication to Arch-System Fabrication Pty Ltd under a subcontract made in late 2023 [4]-[5].
By August 2024, Alliance disputed that Arch-System had achieved practical completion and alleged that the subcontract works contained defects requiring rectification [5]. The parties’ dispute then generated two related but legally distinct processes. Arch-System pursued payment under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). Alliance brought District Court proceedings alleging defects and delay.
Arch-System made a payment claim on 10 June 2025. It obtained an adjudication certificate on 20 July 2025 and registered that certificate as a District Court judgment on 1 August 2025, for $112,029.65 [6]. Alliance had commenced its District Court claim on 18 July 2025, seeking $365,337.67 for defect rectification and liquidated damages, less amounts recovered under bank guarantees [7].
Arch-System’s efforts to recover the judgment debt were largely unsuccessful. A garnishee order produced $1,793, a statutory notice to Pallas produced no payment, and other examination steps did not result in recovery of the outstanding balance [8]. Arch-System then applied for security for costs under UCPR r 42.21 and s 1335(1) of the Corporations Act 2001 (Cth) [9].
The primary judge ordered Alliance to provide $166,000 security [12], [16]. The judge relied in part on the unpaid judgment debt, unsuccessful enforcement, financial information suggesting substantial liabilities and fluctuating cash positions, and the absence of evidence from Alliance’s director or others standing behind the company [10]-[15]. Alliance sought leave to appeal. Its grounds included an argument that s 32(2) of the SOP Act barred reliance on the judgment debt [17]-[18].
The Court of Appeal granted leave only on that statutory argument. It refused leave on the remaining grounds, dismissed the appeal and ordered Alliance to pay Arch-System’s costs [49]. Thus, the appellant obtained leave to raise one question of law, but did not obtain a change to the security order.
The Court began with the statutory framework. Under UCPR r 42.21(1)(d), the threshold for the discretion to order security is whether there is reason to believe that a corporate plaintiff will be unable to pay the defendant’s costs if ordered to do so [19]. Section 1335(1) of the Corporations Act is in similar terms [20]. The Court noted that this threshold is an assessment made on limited materials and is “undemanding” [22]. It is not a trial of the company’s future financial position.
Alliance’s principal legal argument relied on s 32(2) of the SOP Act. Section 32(2) says that nothing done under or for the purposes of Part 3 affects civil proceedings arising under a construction contract, except as provided by s 32(3) [33]. Alliance argued that filing the adjudication certificate as a judgment was an act under Part 3, that its proceedings arose under the subcontract, and that considering non-payment of the resulting judgment would allow the judgment to affect those proceedings [34].
Ball JA rejected that construction by distinguishing the substantive outcome of the construction contract proceedings from their procedural conduct. Section 32(2) protects the parties’ underlying contractual rights and the merits of their claims from being determined by the adjudication process. It does not prevent an interlocutory court from considering relevant procedural matters, such as financial circumstances on a security application [36]. The Court linked that reading to s 32(1), which preserves legal rights, and to the SOP Act’s purpose of prompt payment without altering underlying contractual rights [36].
The Court also separated the judgment’s creation from the subsequent non-payment. The judgment was created by registration under s 25. But the circumstance affecting the security application was that the judgment debt remained unpaid. Ball JA held that non-payment was not itself something done under or for the purposes of Part 3 [37]. The reasoning did not depend on the debt’s statutory origin: the same analysis would apply to a judgment debt from another source [37].
Alliance’s explanation for non-payment was that it had a larger claim against Arch-System under the same contract and could recover any payment if its claim succeeded [38]. The Court considered the argument faced a practical dilemma. If non-payment showed inability to pay debts when due, that supported the security threshold. If it instead showed a deliberate refusal to pay a properly obtained judgment, that could support an inference about how the company or those behind it might deal with a future costs liability [38].
The Court rejected the proposed distinction between an adjudication judgment and a judgment following a court hearing. Section 25 allows an adjudication certificate to be filed as a judgment for a debt and enforced accordingly [32]. Ball JA reasoned that the statutory purpose was to create a legal payment obligation equivalent to a judgment debt following a court hearing [39]. It was therefore open to infer that a person who considered itself entitled to choose which judgments to pay might take a similar approach in another context. The absence of evidence from people able to explain the decision not to pay strengthened the significance of that inference [39].
On the financial evidence grounds, the Court reiterated that the question was not whether Alliance’s inability to pay had been proved on the balance of probabilities. It was whether Arch-System had shown reason to believe Alliance would not pay a costs order if made [41]. The primary judge had considered the incomplete and out-of-date financial information, apparent balance-sheet liabilities, non-payment and cashflow fluctuations. He also addressed the term deposit and its apparent availability [43]. The Court held that adequate reasons did not require a response to every item of evidence individually [43].
Finally, Alliance argued that the primary judge had not considered the merits of its claim. The transcript showed that Alliance’s solicitor accepted the claim could be treated only as arguable and that the primary judge could not find Alliance would win [44]. Alliance had filed no evidence supporting its underlying claim, while Arch-System had filed a defence [45]. On that record, the Court found the primary judge had appreciated that the claim was arguable and had not erred [45].
Before this decision, the judgment identified a District Court decision, J Group Constructions Pty Ltd v PGA Rendering Group Pty Ltd [2015] NSWDC 438, which had accepted that s 32 prevented an adjudication judgment from being taken into account on a security for costs application [47]. In J Group, the court treated s 32 as preventing the application from being determined by the adjudication judgment [47].
The Court of Appeal considered that prior decision sufficiently relevant to justify leave on ground 2A. It then held that J Group “should no longer be followed” [48]. That is the key precedential change recorded in this judgment: the statutory protection in s 32(2) is not a general exclusion of facts connected with an adjudication from procedural decisions in the parties’ related proceedings.
The judgment does not displace the principle that adjudication under the SOP Act does not determine the parties’ underlying contractual rights. To the contrary, the Court relied on that distinction. Section 32 protects the substantive merits and outcome of claims under the construction contract from being determined by an interim adjudication process [36]. The judgment clarifies that the protection does not necessarily prevent a court from considering the later non-payment of a judgment debt when assessing whether security should be provided.
The decision also clarifies how an unpaid judgment debt may operate in the security analysis. It may be relevant to the threshold even where the debt arose from an adjudication rather than a contested judicial hearing. The relevant inference is not automatic proof of insolvency or inability to pay. The Court treated the non-payment as capable of supporting the preliminary “reason to believe” assessment, particularly alongside other financial material and the absence of explanatory evidence [39], [41]-[43].
The case also restates the procedural setting for appellate review. Security for costs is discretionary and interlocutory. The Court noted the reluctance to grant leave on practice and procedure decisions, while requiring an issue of principle, public importance or reasonably clear injustice beyond mere arguability [24]. Intervention in a discretionary decision remains subject to House v The King principles [25].
At [36], Ball JA said s 32(2) is “not concerned with the procedural conduct of the proceedings but with their substantive outcome.” In plain English, the SOP Act protects the final contractual merits from being decided by the adjudication process; it does not dictate every procedural decision a court can make while the parties’ underlying case is on foot.
At [36], the Court said a broader reading would undermine the SOP Act because it would diminish the significance of a judgment obtained under the Act. The point is that a statutory payment judgment is intended to have practical legal significance. Treating it as unusable in a related procedural application would, in the Court’s view, conflict with that function.
At [37], the Court distinguished the registration of the adjudication certificate from Alliance’s later failure to pay. The judgment arose under the SOP Act, but its non-payment was not itself an act under Part 3. The distinction matters because s 32(2) addresses what is done under or for the purposes of Part 3, rather than every later consequence associated with a judgment created under that Part.
At [39], the Court described the s 25 obligation as equivalent to a judgment debt obtained after a court hearing. In plain terms, the Court did not accept that a debtor could treat an adjudication judgment as having a lesser status for this purpose. The Court considered that a decision to select which judgment debts to pay could inform an assessment of future payment behaviour.
At [41], the Court emphasised that the threshold was not proof on the balance of probabilities that Alliance would be unable to pay. It was whether there was reason to believe it would not pay if ordered. That distinction is important: a security application is a preliminary risk assessment, not a final determination that the company is insolvent or will inevitably default.
At [43], the Court explained that the primary judge did not have to discuss every evidentiary item separately, provided the reasons adequately explained why the threshold was met. The Court found that the judge had identified the main matters relied on, including incomplete financial information, liabilities, unpaid debt and cashflow variability.
The decision is most directly relevant where a corporate plaintiff seeks to pursue proceedings arising under a construction contract, while the defendant has an unpaid judgment debt obtained through the SOP Act. It addresses a challenge that s 32(2) prevents the unpaid debt from being considered in a security for costs application [34]-[37].
The reasoning also bears on cases where a corporate plaintiff’s payment conduct is disputed. The judgment recognises that non-payment may have more than one possible explanation: inability to pay, or a deliberate choice not to pay [38]. Either explanation may be relevant to the security threshold, though the actual significance depends on the evidence and the application before the court.
The evidentiary circumstances here included largely unsuccessful enforcement, financial records showing substantial creditor liabilities, cashflow variations, a term deposit, and no evidence from the company’s director or another person controlling or supporting the company [8], [10]-[11], [39], [43]. The judgment does not make any one of those facts a mandatory requirement. Rather, it explains why the primary judge could assess the total material as sufficient to meet the preliminary threshold.
The decision is not a ruling that every unpaid adjudication judgment establishes reason to believe that security is appropriate. The Court addressed the threshold question in the specific evidentiary context and observed that the non-payment could be considered. The separate discretionary question whether security should actually be ordered remains distinct under r 42.21(1A), including consideration of whether security would stifle the proceedings [19]. The appeal did not establish error in the order made on the facts before the Court.
The supplied judgment is dated 4 August 2026 and does not identify any later decisions applying or distinguishing it. It is therefore not possible, from this judgment alone, to describe subsequent treatment by later courts.
The judgment itself explains the immediate precedential relationship with J Group Constructions. J Group had accepted the contrary interpretation of s 32 in a security application involving an unpaid adjudication judgment [47]. The Court of Appeal expressly stated that J Group should no longer be followed [48]. That is the only decision in the judgment identified as having its treatment changed.
Other authorities are cited for the governing context rather than for the specific SOP Act question. TFM Epping Land is cited in support of reading s 32(1) as concerned with legal rights rather than practical effects [36]. Cornelius, HP Mercantile and Treloar are cited concerning the threshold and its preliminary or undemanding character [22]-[23]. Allianz Australia Insurance and Sweeney are cited concerning adequate reasons and the need not to deal separately with each item of evidence [43]. House v The King supplies the appellate review framework for discretionary decisions [25].
The judgment’s own holding can therefore be stated narrowly: s 32(2) does not prevent a court from considering the non-payment of an adjudication judgment as a factor in a security for costs application. Whether later courts have applied that construction, or have developed its limits, is not established by the material provided.
The judgment does not define when non-payment will be sufficiently probative in a different factual setting. It holds that non-payment may support an inference relevant to a future costs liability, and that the threshold was met here [39], [41]. It does not set out a universal rule that non-payment alone will always suffice.
Nor does the decision resolve how the inference should operate where a company provides detailed, current evidence explaining non-payment, or where the company calls evidence from directors or other controllers. The Court expressly noted that the persons who could explain the matter had not given evidence [39]. The weight of non-payment could therefore be different in a case with a fuller explanation or materially different financial evidence.
The Court also did not decide the merits of Alliance’s underlying defects and delay claim. It proceeded on the basis that the claim was arguable, following the concession recorded at [44]-[45]. The outcome should not be read as a determination of the contractual dispute or as a finding that Alliance’s allegations were true or false.
Finally, the Court did not examine in detail the broader discretionary factors under r 42.21(1A), beyond the matters relevant to the grounds argued and the primary judge’s treatment of the term deposit and possible stifling [15], [19], [43]. The judgment establishes that the unpaid debt could be considered at the threshold stage. It does not exhaustively prescribe how courts should balance all discretionary factors in other security for costs applications.
This is general legal information, not legal advice. Zoe can make mistakes. Before acting on, relying on, or using this analysis, have a qualified Australian lawyer check it.
Source: NSW Caselaw (www.caselaw.nsw.gov.au). Converted to plain text by ZoeLaw. Not the official version.
Medium Neutral Citation: Alliance Living Pty Ltd v Arch-System Fabrication Pty Ltd [2026] NSWCA 157
Hearing dates: 28 July 2026
Date of orders: 4 August 2026
Decision date: 04 August 2026
Before: Payne JA at [1]
Adamson JA at [2]
Ball JA at [3]
Decision: (1) Refuse leave to appeal in relation to grounds 1, 2 and 3 to 6 of the draft notice of appeal;
(2) Grant leave to appeal in relation to ground 2A;
(3) Appeal dismissed;
(4) The appellant to pay the respondent’s costs.
Catchwords: CIVIL PROCEDURE – security for costs – threshold question – whether primary judge prohibited from taking into account unpaid judgment obtained under Building and Construction Industry Security of Payment Act 1999 (NSW) – s 32(2) not concerned with the procedural conduct of civil proceedings under a construction contract but with their substantive outcome – non-payment of judgment debt not something “done under or for the purposes of this Part”
Legislation Cited: Building and Construction Industry Security of Payment Act 1999 (NSW), ss 25, 32
Contractors Debts Act 1997 (NSW), s 6
Corporations Act 2001 (Cth), s 1335
District Court Act 1973 (NSW), s 127(2)(a)
Uniform Civil Procedure Rules 2005 (NSW), r 42.21
Cases Cited: Alliance Living Pty Ltd v Arch-System Fabrication Pty Ltd [2026] NSWDC 30
Allianz Australia Insurance Ltd v Cervantes [2012] NSWCA 244
Cheng v Motor Yacht Sales Australia Pty Ltd t/as The Boutique Boat Company (2022) 108 NSWLR 342; [2022] NSWCA 118
Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65
Daracon Engineering Pty Ltd v Kelsall [2025] NSWCA 189
House v The King (1936) 55 CLR 499; [1936] HCA 40
HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87
In re the Will of F B Gilbert (dec) (1946) 46 SR (NSW) 318
J Group Constructions Pty Ltd v PGA Rendering Group Pty Ltd [2015] NSWDC 438
Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93
PPK Willoughby Pty Ltd v Baird [2019] NSWCA 48
Sweeney v He [2023] NSWCA 68
TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 118
Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302
Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245
Category: Principal judgment
Parties: Alliance Living Pty Ltd (Applicant)
Arch-System Fabrication Pty Ltd (Respondent)
Representation: Counsel:
E Elliott (Applicant)
D Byrne (Respondent)
Solicitors:
Gerges Law Group (Applicant)
Moray & Agnew (Respondent)
File Number(s): 2026/104597
Publication restriction: Nil
[This headnote is not to be read as part of the judgment]
A builder, Alliance Living Pty Ltd (Alliance), fell into dispute with its subcontractor, Arch‑System Fabrication Pty Ltd (Arch-System), about the adequacy of works performed by Arch-System at a construction project. After an adjudication under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act), Arch-System obtained an adjudication certificate which it registered as a judgment against Alliance in the District Court (the Judgment Debt). Alliance commenced proceedings in the District Court against Arch-System claiming damages for defects and delays. Arch-System applied for security for its costs, which the primary judge granted. In doing so, the primary judge took account of the unpaid Judgment Debt, the fact that enforcement of the Judgment Debt had been largely unsuccessful, Alliance’s submission that it was unwilling to pay the Judgment Debt, and other matters relating to Alliance’s financial position.
Section 32(2) of the SOP Act, contained within Part 3, provides: “Nothing done under or for the purposes of this Part affects any civil proceedings arising under a construction contract, whether under this Part or otherwise, except as provided by subsection (3)”. Also contained within Pt 3 is s 25, which allows for an adjudication certificate to be filed as a judgment for a debt in any court of competent jurisdiction.
Alliance applied for leave to appeal, contending that: (1) s 32(2) of the SOP Act prohibited the primary judge from taking into account the fact that it had not paid the Judgment Debt; (2) the fact that it chose not to pay the Judgment Debt was irrelevant to the question whether those behind Alliance might so organise their affairs that Alliance would be unable to meet any costs orders against it; (3) the primary judge failed to take into account the fact that it paid its debts as and when they fell due and failed to take into account the nature of the Judgment Debt; and (4) the primary judge, in exercising his discretion to order security, failed to take into account the merits of Alliance’s claim.
The Court (Ball JA, Payne and Adamson JJA agreeing) held, granting leave to appeal in part and dismissing the appeal with costs:
As to (1): The argument based on s 32 of the SOP Act
TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 118, cited.
J Group Constructions Pty Ltd v Pga Rendering Group Pty Ltd [2015] NSWDC 438, disapproved.
As to (2): The inferences to be drawn from non-payment
As to (3): The alleged failure to take account of relevant matters
Allianz Australia Insurance Ltd v Cervantes [2012] NSWCA 244; Sweeney v He [2023] NSWCA 68, cited.
As to (4): The failure to consider the merits of the proceedings
PAYNE JA: I agree with Ball JA.
ADAMSON JA: I agree with Ball JA.
BALL JA: Alliance Living Pty Ltd (Alliance) seeks leave to appeal against orders made in the District Court of NSW by Newlinds SC DCJ on 23 February 2026 requiring it to provide security for the costs of the respondent, Arch‑System Fabrication Pty Ltd (Arch-System), in the amount of $166,000. Leave to appeal is required because the challenged orders are interlocutory: District Court Act 1973 (NSW) s 127(2)(a).
Alliance is a building contractor. It was engaged by Pallas Development Management Pty Ltd trading as Fortis Development Group (Pallas) to perform building work at a commercial property owned by Pallas at 24 Bay Street, Double Bay, NSW (the Property).
By a subcontract entered into in late 2023 (the Subcontract), Alliance engaged Arch-System to complete aluminium glazing, cladding, louvres and associated fabrication works at the Property. Towards the end of those works in August 2024, Alliance disputed that Arch-System had achieved practical completion of the Subcontract and alleged the existence of defects which it required Arch‑System to rectify.
On 10 June 2025, Arch-System issued a payment claim to Alliance under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) for the balance of the contract sum under the Subcontract. It obtained an adjudication certificate on 20 July 2025, and on 1 August 2025 registered the certificate as a judgment of the District Court against Alliance for a debt in the amount of $112,029.65 (the Judgment Debt).
In the meantime, on 18 July 2025, Alliance commenced the proceedings in the District Court against Arch-System claiming that Arch-System had failed to complete the works on time, and that the works Arch-System had performed contained defects which Arch-System had not rectified. It claimed an amount of $365,337.67 comprising $264,588.17 for “costs associated with defect rectification” and liquidated damages of $201,499, less the amount of two bank guarantees which Arch-System provided as security under the Subcontract and which Alliance had drawn on.
Arch-System has taken steps to recover the Judgment Debt, largely without success. It served a garnishee order on the Commonwealth Bank of Australia, as a result of which it received $1,793. It served a notice of claim under s 6 of the Contractors Debts Act 1997 (NSW) on Pallas, in response to which no payment was received. It issued an examination notice requiring Alliance to provide documents and information and obtained an order for the sole director and secretary of Alliance, Mr Terry Younes, to be examined. Alliance produced documents in response to the examination notice, but Mr Younes has not been examined and the order for his examination has been set aside. Enforcement has otherwise not been stayed, and the balance of the Judgment Debt remains outstanding.
On 9 February 2026, Arch-System filed a notice of motion in the court below seeking orders for security for its costs under r 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) and s 1335 of the Corporations Act 2001 (Cth) (Corporations Act).
In support of its application for security, Arch-System relied on an affidavit from its solicitor, Mr Patrick Kaluski. Mr Kaluski described attempts made by Arch‑System to recover the Judgment Debt, and annexed records of searches undertaken in relation to Alliance’s financial position and documents produced by Alliance in relation to the examination notice. Those searches and records revealed that:
Alliance had paid up share capital of $218,000 held by AEKC Holdings Pty Ltd;
Alliance did not own any real property in NSW but was the lessee of premises in Sydney Olympic Park;
As at 31 October 2025, Alliance owed some $9.3 million to creditors and was owed some $5.4 million by its debtors; and
Alliance had a line of credit with Prospa Advance Pty Ltd of $150,000 with a closing balance of $127,718.65 as at 31 October 2025;
As at 26 November 2025, Alliance had seven bank accounts with Commonwealth Bank, of which six had no or next to no funds and another had a closing balance of -$488,349.02;
Alliance had three term deposit investments with Commonwealth Bank which had been created between 6 and 9 December 2025 and totalled $998,289.13 as at 9 December 2025.
Alliance did not serve any evidence from Mr Younes or any other person standing behind Alliance. It relied on an affidavit sworn by its solicitor, Mr George Gerges, which annexed records which had been provided by Alliance in November and December 2025 in connection with the examination notice.
After a hearing on 23 February 2026, the primary judge made orders and gave ex tempore reasons which were subsequently revised and published: see Alliance Living Pty Ltd v Arch-System Fabrication Pty Ltd [2026] NSWDC 30.
In relation to the threshold question whether there was reason to believe Alliance would be unable to pay Arch-System’s costs if ordered to do so (to use the language of UCPR r 42.21(1)(d)) so as to enliven the discretion to order security for costs, the primary judge emphasised the fact that the Judgment Debt had not been paid. After referring to the Judgment Debt and Arch-System’s attempts at enforcement, his Honour said:
[9] From all that, it can be seen that part of [Alliance’s] financial position as of today is that it has, as a liability, an unpaid and unsatisfied judgment debt in an amount of well over $110,000, which has not been paid. The question then becomes what is the reason for that non-payment. Mr Gerges submits that, based on the totality of the evidence, I should infer that the non-payment of that debt is not demonstrative of any inability to pay the debt, rather it is the result of a decision not to pay the debt by his client and in no way therefore has any relevance to the question before me, which is that is reason to believe that at some future date there might be an inability to pay a costs order.
[10] He relies on cases such as Idoport Pty Limited & Anor v National Australia Bank Limited & 8 Ors; Idoport Pty Limited & Market Holdings Pty Limited v Donald Robert Argus; Idoport Pty Limited “JMG” v National Australia Bank Limited [35] [2001] NSWSC 744 for the proposition that the question on security for costs is not whether a party will be unwilling to pay a debt, but the question is whether it will be unable to pay a debt.
[11] I am very familiar with that case and other cases to the same effect, but to my mind, the proposition as just stated overstates things. If a court is satisfied that a corporation has demonstrated an unwillingness to pay debts of a particular creditor, as is the case here, then I consider that to be relevant to the question of fact as to whether at some point in the future it will be unable to pay that creditor a debt. That is because a demonstrable unwillingness to pay a particular creditor [sic] debts by a corporation can support an inference that those in control of the corporation might have a propensity to organise the corporations [sic] affairs at some point in the future, so as to put it into a position where it is unable to pay a particular debt. I am not saying it would be determinative, but in my opinion it is relevant and in this case, has relevance.
[13] On a balance sheet basis, [Alliance] certainly appears to have more liabilities than assets, but of course, that is not the test. The test is whether on a cashflow basis in the ordinary run of the operation of [Alliance’s] business there is reason to believe that it might be unable to pay a costs order at some point in the future.
[14] When I take all of the evidence into account, including the history of non-payment of the judgment debt, but also the very wide swings between positive cash balances and negative cash balances experienced by [Alliance] which perhaps are not unusual in a building company, I am satisfied as to the threshold test which I remind myself has been described in cases as “undemanding”, see for example Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302 at [11]. That is, I think there is reason to believe that [Alliance] will be unable to pay any costs order at some point in the future.
[15] … At this point, Mr Gerges found himself walking a forensic tight rope. As I have said, he emphatically submitted to me that I should be satisfied that his client was not just cashflow positive, but cashflow rich, and could pay the judgment debt whenever it liked but was simply choosing not to. He then submitted when dealing with discretionary considerations that I should find that if I was to order security for costs, that might have an adverse impact on his client’s ability to conduct their business and/or might stultify his client’s ability to conduct the litigation.
[16] There is no evidence of that at all, there is a million dollars as of today [that is, 23 February 2026] in a term deposit, which as I read the evidence, can be released to [Alliance] without penalty on seven days’ notice. That is the submission that was made on behalf of [Alliance]. There is no suggestion that money is held as security for anything. It might be security for the $900,000 liability on the credit facility, but that is not Mr Gerges’ submission. There is no evidence of any pressing other need for that money to be used to pay other creditors, and quite frankly, if a company with this turnover was to be put at jeopardy because of payment of an amount of around $150,000, I would be extremely concerned as to its solvency.
[17] For all those reasons, I am satisfied that I have power to order the security sought and as a matter of discretion, that I should make that order, and I will make that order. …
(1) [Alliance] is to provide security within 14 days for [Arch-System’s] costs in the proceedings, in the sum of $166,000, either by payment into Court or such other basis in which the parties agree.
(2) Liberty to [Arch-System] to apply on short notice if Order 1 is not complied with.
(3) Give [Arch-System] liberty to apply for the provision of further security for costs if, in preparation for hearing, it becomes apparent that $166,000 may prove inadequate.
(4) [Alliance] is to pay [Arch-System’s] costs of, and incidental to, the Notice of Motion as agreed or assessed.
(5) Such liberty can be exercised in the first instance by emailing the associate of Newlinds SC DCJ, whereby arrangements will be made to relist the matter.
1. The Primary Judge erred by failing to properly consider the material before him in relation to the Applicant’s financial position.
- The Primary Judge erred by failing to have regard to the context of the outstanding judgment debt.
3. The Primary Judge erred by considering the Applicant’s unwillingness to pay the outstanding judgment debt as a matter relevant to whether it will be unable to meet a future costs order.
4. The Primary Judge erred by drawing an inference not supported by evidence, namely that the directors of the Applicant might have a propensity to organise the corporation’s affairs in the future to be unable to pay a particular debt.
5. The Primary Judge erred by finding the Plaintiff will be unable to pay any costs order at some point in the future.
6. The Primary Judge erred by failing to consider the merits and circumstances of the proceeding.
2A. The Primary Judge was prohibited by section 32(2) of the Building and Construction Industry Security of Payment Act 1999 (NSW) from considering the judgment debt as a matter relevant to the security for costs application.
Under UCPR r 42.21(1)(d), the discretion to order security for costs is enlivened if, on the application of a defendant, there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so. Where the discretion is enlivened, subsection (1A) sets out a list of factors to which the court may have regard in determining whether it is appropriate to order security, including, relevantly, whether an order for security for costs would stifle the proceedings: r 42.21(1A)(f).
Section 1335(1) of the Corporations Act is in similar terms. It provides:
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.
Both sources of power involve the exercise of a discretionary judgment. The principles governing the exercise of the discretion under each source of power are relevantly the same: see Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245 at [28] (Beazley JA), citing Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93 at [15].
Under each source of power, the threshold test is whether there is “reason to believe” that the plaintiff “will be unable” to meet an adverse costs order. The words “reason to believe” recognise that the court’s assessment of the financial position of a plaintiff on an application for security for costs is almost inevitably a preliminary one based on limited materials: see Cornelius v Global Medical Solutions Australia Pty Ltd*;* Farag v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 (Cornelius) at [16] (Macfarlan JA, Tobias AJA agreeing). As the primary judge pointed out, the test is an undemanding one: see HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87 at [17] (Ward JA); Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302 at [11] (Beazley ACJ).
While the legal onus of proving entitlement to an order for security for costs rests on the applicant, where the jurisdictional basis for an order for security is established, there is an evidential burden on the other party to raise for consideration matters that favour it if it wishes them to be taken into account in the determination of the application: see Cornelius at [18]-[20].
Generally, a grant of leave to appeal “requires the identification of an issue of principle, a question of public importance or a reasonably clear injustice going beyond something that is merely arguable”: see Cheng v Motor Yacht Sales Australia Pty Ltd t/as The Boutique Boat Company (2022) 108 NSWLR 342; [2022] NSWCA 118 at [15] (Bell CJ, with whom Ward P and Basten AJA agreed), and cases cited there. Moreover, where, as here, the subject of the appeal relates to matters of practice and procedure, there is a well-known reluctance to grant leave to appeal, which reflects the undesirability of the delay and cost associated with challenges to exercises of discretion in interlocutory applications: see In re the Will of F B Gilbert (dec) (1946) 46 SR (NSW) 318 at 323; Daracon Engineering Pty Ltd v Kelsall [2025] NSWCA 189 at [65]. A decision to order security for costs is one which attracts that reluctance: PPK Willoughby Pty Ltd v Baird [2019] NSWCA 48 at [3].
Finally, to the extent that the primary judge’s decision was discretionary, appellate intervention will only be warranted in accordance with the principles stated in (1936) 55 CLR 499; [1936] HCA 40. To succeed, Alliance must establish material error in the making of a finding of fact upon which the decision is based, in the taking or not taking into account of material factors or in some other matter of principle. If no specific error can be established, error may be inferred if the decision is unreasonable or plainly unjust.
Alliance essentially advances four arguments for why leave to appeal should be granted and the appeal allowed.
First, Alliance submits that the primary judge was prohibited by s 32(2) of the SOP Act from taking into account the fact that it had not paid the Judgment Debt. That argument is raised principally by ground 2A but also by ground 2.
Second, Alliance submits that the fact that it chose not to pay the Judgment Debt was irrelevant to the question whether those behind Alliance might so organise their affairs that Alliance would be unable to meet any costs orders against it. That argument is raised by grounds 3 and 4.
Third, Alliance submits that in concluding that there was reason to believe that it would be unable to pay Arch-System’s costs if ordered to do so the primary judge failed to take into account, or failed to give proper weight to, the evidence showing that it had paid its debts as and when they fell due and failed to take into account the particular nature of the debt in question – namely, that it arose from an adjudication determination. That argument is raised primarily by ground 1 but also by ground 5.
Fourth, Alliance submits that the primary judge, in exercising his discretion to order security, failed to take into account a relevant matter – namely, the merits of Alliance’s claim. That argument is raised by ground 6.
It is convenient to deal with the arguments in the order set out above rather than the order in which they are raised by the draft notice of appeal.
Section 25 of the SOP Act relevantly provides:
25 Filing of adjudication certificate as judgment debt
(1) An adjudication certificate may be filed as a judgment for a debt in any court of competent jurisdiction and is enforceable accordingly.
…
(4) If the respondent commences proceedings to have the judgment set aside, the respondent—
(a) is not, in those proceedings, entitled—
(i) to bring any cross-claim against the claimant, or
(ii) to raise any defence in relation to matters arising under the construction contract, or
(iii) to challenge the adjudicator’s determination, and
(b) is required to pay into the court as security the unpaid portion of the adjudicated amount pending the final determination of those proceedings.
32 Effect of Part on civil proceedings
(1) Subject to section 34, nothing in this Part affects any right that a party to a construction contract—
(a) may have under the contract, or
(b) may have under Part 2 in respect of the contract, or
(c) may have apart from this Act in respect of anything done or omitted to be done under the contract.
(2) Nothing done under or for the purposes of this Part affects any civil proceedings arising under a construction contract, whether under this Part or otherwise, except as provided by subsection (3).
(3) In any proceedings before a court or tribunal in relation to any matter arising under a construction contract, the court or tribunal—
(a) must allow for any amount paid to a party to the contract under or for the purposes of this Part in any order or award it makes in those proceedings, and
(b) may make such orders as it considers appropriate for the restitution of any amount so paid, and such other orders as it considers appropriate, having regard to its decision in those proceedings.
Alliance’s argument in relation to ground 2A has the following three steps:
The filing of an adjudication certificate as a judgment in the District Court under s 25 of the SOP Act is something that is done “under or for the purposes of this Part” (that is, Pt 3 of the SOP Act, which contains both ss 25 and 32);
As a result, the Judgment Debt cannot affect the proceedings before the primary judge because those proceedings were civil proceedings arising under the Subcontract (which was a “construction contract” for the purposes of the SOP Act);
To take the non-payment of the Judgment Debt into account in determining the question whether security for costs should be ordered in the proceedings would be to permit the Judgment Debt to affect the proceedings contrary to (2).
There are difficulties with both steps (2) and (3) of this argument.
As to step (2), it is apparent that s 32(2) of the SOP Act is not concerned with the procedural conduct of the proceedings but with their substantive outcome. Section 32(2) makes it clear that the merits of any claim under the construction contract (here, the Subcontract) are unaffected by an adjudication determination or the obtaining of a judgment under Pt 3. That reading is consistent with the fact that s 32(1) is concerned with the legal rights of the parties and not the practical effect upon them: see TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 118 at [82]ff. It is also consistent with the policy of the SOP Act, which is to provide a mechanism to ensure the prompt payment of contractors and subcontractors in the building industry but in a way that does not affect the parties’ underlying contractual rights. The purpose of the section is not to regulate the actual conduct of the proceedings and, in particular, what may be considered in ordering security. Understood in that way, the reference to “Nothing … affects any civil proceedings” must be read as a reference to anything that has a substantive effect on the proceedings. To give the expression a broader meaning would be to undermine rather than to promote the policy of the SOP Act because it would diminish the significance of a judgment obtained in accordance with the Act, which is the mechanism by which the Act ultimately achieves its purpose.
As to step (3), it is not correct to say that it is the creation of a judgment debt by the registration of an adjudication certificate that affects the civil proceedings that arise under the Subcontract. Rather, what affects the civil proceedings (that is, the outcome of the security for costs application) is the non-payment of the judgment debt. That non-payment is not something that is done “under or for the purposes of this Part”. Nothing about the non-payment and its consequences for the security for costs application depends on the fact that the non-payment relates to a judgment debt obtained under “this Part”. The same process of reasoning applies irrespective of the source of the judgment debt or the mechanism by which it was obtained.
Alliance sought to explain that the reason for its non-payment of the Judgment Debt was because it had a larger claim against Arch-System arising from the same construction contract, and if that claim succeeded any amount it paid to Arch-System would be recoverable under s 32 of the SOP Act. But in making that submission, Alliance was faced with a dilemma, as the primary judge appreciated. Either the non-payment of the Judgment Debt provided some reason for thinking that Alliance was unable to pay its debts as and when they fell due or it was a brazen refusal to pay a properly obtained judgment debt under legislation that was designed to ensure the prompt payment of building sub-contractors. If the former, it provided a reason to believe that Alliance would be unable to pay Arch-System’s costs if ordered to do so. If the latter, it provided a reason to believe that Alliance, or those standing behind it, might so organise its affairs that it would not have the resources to meet any costs liability it had to Arch-System, which again provided a reason for believing that the threshold requirement for an order for security had been met.
Alliance submitted that it could not be inferred from the fact that it had failed to pay an administratively obtained judgment debt that it would or might so organise its affairs to avoid paying a judgment debt resulting from a judicial determination. But why that inference could not be drawn was never properly explained. Underlying the submission appears to be an assumption that a judgment debt obtained under s 25 of the SOP Act was of such a different and inferior quality to a judgment debt arising from an order of a judge that it was understandable that someone might reasonably refuse to pay one but not the other. There is no merit in that submission. The whole point of s 25 of the SOP Act is to create a legal obligation to make the payment which is equivalent to a judgment debt obtained as a consequence of a hearing before a court. It is reasonable to infer that someone who believes they are entitled to choose which judgment debts they should satisfy and which they should not in one context might be prepared to adopt the same approach in a different context if they believed that they should not be liable for the debt. That is particularly so when the persons who could have given evidence about the matter elected not to do so.
It is not easy to follow the argument in relation to grounds 1 and 5, or why it is said they raise a question of principle that would justify the grant of leave.
The issue for the primary judge was not whether on the balance of probabilities, and taking account of all the evidence, Alliance would not be able to pay Arch‑System’s costs if ordered to do so. Rather, the question was whether Arch-System had established that there was reason to believe that Alliance would not pay its costs if ordered to do so. In the context, that requirement was satisfied by the fact that, for whatever reason, Alliance had not paid the Judgment Debt.
Alliance submitted that the primary judge ought to have taken into account (a) the administrative nature of the debt; (b) the term deposit of $998,289.13; (c) the activity statements from the Australian Taxation Office showing significant income; (d) evidence that Alliance was a good borrower and had met its lease payments; (e) a third-party company extract showing that it had a satisfactory credit score; and (f) a company extract demonstrating that it was incorporated in 2020 and remains registered and solvent.
As has already been explained (a) was irrelevant. It was not necessary for the primary judge to deal with each piece of evidence relevant to the threshold question and relied on by Alliance: see Allianz Australia Insurance Ltd v Cervantes [2012] NSWCA 244 at [22] (Basten JA, with whom McColl and Macfarlan JJA agreed). What the primary judge was required to do was give adequate reasons for why he concluded that the threshold requirement had been satisfied: see, for example, Sweeney v He [2023] NSWCA 68 at [131]ff (Ward P, with whom Brereton and Mitchelmore JJA agreed). His Honour did that. In particular, his Honour explained that Alliance had chosen to put on “non-complete” and “non-up-to-date” information concerning its financial position, that on a balance sheet basis, Alliance appeared to have more liabilities than assets, that it had not paid a debt that was due and that it had large swings in cashflow. His Honour was entitled to conclude that those matters were sufficient to meet the threshold requirement. His Honour also specifically addressed the fact of the term deposit, but pointed out that the availability of the term deposit to pay the Judgment Debt was difficult to reconcile with submissions made by Alliance that an order for security may stultify the proceedings.
HIS HONOUR: You don’t suggest that I can approach the claim by your client on anything other than it’s an arguable case, do you? I can’t make a finding they’re going to win.
GERGES: No, but you can make the finding that if they lose this money is real [that is, the money held on deposit], and they can access it, and they can access the money on the judgment now if they take enforcement action the way that’s available to them.
Leaving ground 2A aside, none of the proposed grounds of appeal raises an issue of principle, a question of public importance or a reasonably clear injustice going beyond something that is merely arguable. Accordingly, leave to appeal in relation to those grounds should be refused.
In relation to ground 2A, there is at least one decision of the District Court which has accepted the argument advanced by ground 2A, and that is the decision of Taylor SC DCJ in J Group Constructions Pty Ltd v Pga Rendering Group Pty Ltd [2015] NSWDC 438. In that case, the defendants sought security for costs in proceedings arising under a construction contract, relying on factors which included that the first defendant had previously obtained a judgment against the plaintiff as a result of an adjudication, which remained largely unpaid: see [2]. In relation to the question whether the court could take account of that matter, His Honour said:
[8] Fourthly, reliance was placed upon the policy evident in the [SOP Act] that the risk of non-payment is to be borne by J Group pending the final determination of the proceedings. However, s 32 of the [SOP] Act provides that the [SOP] Act should not affect civil proceedings arising under the construction contract. In my view, this application is not to be determined by the judgment arising from the adjudication.
In view of that decision, which should no longer be followed, it is appropriate to give leave to appeal in relation to ground 2A but to dismiss the appeal.
Accordingly, the orders I propose are:
Refuse leave to appeal in relation to grounds 1, 2 and 3 to 6 of the draft notice of appeal;
Grant leave to appeal in relation to ground 2A;
Appeal dismissed;
The appellant to pay the respondent’s costs.
**********
Alliance Living Pty Ltd
Arch-System Fabrication Pty Ltd
[1936] HCA 40
(2022) 108 NSWLR 342
(1936) 55 CLR 499
(2008) 20 VR 377
Leave to appeal refused in relation to grounds 1, 2 and 3 to 6; leave granted in relation to ground 2A; appeal dismissed; appellant to pay respondent’s costs.