Peace of Mind Computing Pty Ltd v Daoud

The Applicable Law

1. Pursuant to rules 42.21 of the Uniform Civil Procedure Rules 2005 and section 1335 of the Corporations Act 2001 (Cth), the court has discretion to order a plaintiff to "give such security as the court thinks fit".
2. Both the rule and the section are in similar terms. The Act requires credible testimony that a corporation will be unable to pay the costs of the defendant to enliven the discretion, and the rule requires a "reason to believe the plaintiff will be unable to pay the costs of the defendant if ordered to do so".
3. The defendant bears the onus of establishing that there is reason to believe the plaintiff will be unable to meet an adverse costs order.
4. The material before the court must be "sufficiently persuasive to permit a rational belief to be formed that if ordered to do so the corporation would be unable to pay the costs of the opposing party". [1]
5. There cannot be "reason to believe" merely because there is a risk, no matter how slight, that the plaintiff will not be able to meet an adverse cost order, [2] and when making its assessment the court should use a practical and common sense approach to the examination of a corporation's financial affairs.
6. Once cogent evidence of the plaintiff's difficulties are before the court, it is for the plaintiff to satisfy the court, taking into account all the relevant factors, that the court's discretion ought to be exercised by either refusing to order security or order some lesser amount.
7. His Honour Justice French in the case of East Grace Corporation [3] said at [6]: The question in determining whether security should be awarded and, if so, what the quantum is, is essentially one of risk management between the parties having regard to their legitimate interests both as applicant and respondent. There is the question of the risk to the respondent of non-recovery. There is the question of any prejudice to the applicant …. There is also the established principle that the award of security for the costs is generally not granted at the level of full indemnity. This has regard to the uncertainties of litigation including, of course, … the possibility that litigation can be settled. His Honour went on to say at [7]: The quantification of an appropriate amount by way of security is certainly not an exact science.
8. Satisfaction of the "threshold" test, if achieved, does not predispose the court to exercise its discretion in favour of ordering security. [4] The question of whether in any particular case an order should be made depends on all the circumstances of the case.
9. A number of factors are listed in rule 42.21(1A) to assist the court in the exercise of its discretion. It is not an exclusive list because the rule states that the court may have regard to these matters and "such other matters as it considers relevant".
10. Overall in exercising the discretion the court must have concern to achieve a balance between ensuring that adequate and fair protection is provided to the defendant, and injustice to an impecunious plaintiff is avoided by unnecessarily shutting out or prejudicing it in the conduct of its proceedings.
11. The Court of Appeal noted in Wollongong City Council [5] that the factors relevant to the exercise of the discretion have been identified as follows:

• The quantum of risk that a costs order will not be satisfied
• Whether the making of an order would be oppressive in that it would stifle a reasonably arguable case
• Whether the impecuniosity of the applicant arises out of the conduct complained of
• The prospects of success
• Whether there are aspects of public interest which weigh in the balance against such an order
• Whether there are any particular discretionary matters peculiar to the circumstances of the case
• Delay is a relevant factor
• Whether those who stand to benefit from the litigation offer to be responsible for the costs

1. The possibility of stultification is a "powerful" factor to be taken into account by the Court in exercising its discretion as to whether an order is appropriate: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542. However, Clarke J in Yandil observed that the fact that a plaintiff is financially unable to provide security does not lead to the inevitable conclusion that the making of the order will stultify the plaintiff's claim, nor does it lead to the automatic refusal of an order.
2. The discretion must be exercised having regard to all the circumstances of the case, but the inability of the plaintiff to meet the costs of a successful defendant, being the occasion for invoking the exercise of the discretion, is likely to play an important if not decisive role.

The Relevant Circumstances

1. The following are the circumstances relied on by the applicant and respondent and my brief assessment of each: 1. The applicant estimates that the professional costs will reach the amount of approximately $69,000. This includes costs to date and factoring in a two day hearing with junior counsel briefed. Although some difficulty may be encountered in determining the terms of the agreement reached between the parties, the estimate seems extravagant bearing in mind the type of matter which is relatively straightforward and the value of the claims, which are for $32,000 on the statement of claim and $16,000 on the cross claim. The respondent's estimate of costs appears more realistic. Its estimate for its own costs is approximately $26,000. 1. The Australian Securities and Investment Commission records reveal that the respondent company is a propriety company limited by shares the total value of which is $10.00. The company has been registered since 1999. There are a number of entries indicating strike out action has been commenced. This usually occurs due to a number of possible circumstances such as not complying with the return of particulars, or providing an annual review or failure to respond to some other compliance requirement. Mr Munro is the director and secretary and a shareholder in the company. The company does not appear to have any significant assets or real property. The strike out entries, bearing in mind the company is still operating, most likely indicate momentary noncompliance with regulatory obligations, and as no submissions were made on the issue I will give it no weight. 1. The company has professional indemnity insurance, however it is unclear if the policy would cover these proceedings or if the insurer has been informed or advised of them, and so little weight can be given to its existence without further information being provided. 2. Only the 2013 tax return has been provided by the respondent. It reveals of total turnover of $111,573. The profit appears to be $39,000, with some liabilities carried over from another year totalling $15,000. Wages totalling $15,000 are indicated and it is not clear if this is an employee or indeed Mr Munro's wage. Assets value is noted as $88,000 and an amount of $1,717 is noted as depreciation expenses. Motor vehicle expenses are noted at a value of $3,506. Total expenses come to $71,000. The return indicates that there is no taxable income. It is often the case that tax returns reveal very lean financial circumstances but even taking into account that the return may have been prepared with a more favourable tax outcome in mind it shows a company with very limited income and limited financial resources at its disposable. The explanation for the provision of only one tax return is inadequate. 1. The bank statement shows cash balance of $13,942 at the end of the last quarter in 2015. This amount though is by no means the average or mean amount held in this account. The provision of a bank statement for one quarter only does not allow a realistic assessment to be made of the respondent's financial circumstances, in particular it does not allow the court to draw a conclusion that an amount of approximately $13,000 is always at the disposal of the respondent to meet running costs and outgoings. 1. The respondent claims to have $385,000 worth of computing hardware. However, there is no foundation provided for this valuation. It is not clear if this was the original purchase price or the estimated resale value. It is unclear how old the hardware is or whether it is the subject of any depreciation. 1. There has been no delay in the bringing of this application. 2. The claim brought by the plaintiff has merit. It has been observed that the existence of an arguable case should be treated as a neutral consideration. [6] 3. There was no submission that the defendant has contributed to the plaintiff's financial circumstances or that the proceedings would be stultified if a security order was made, although that is always an important consideration for the court.

Determination

1. On this evidence there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so. Therefore the discretion to make a security costs order is enlivened.
2. In all the circumstances I am satisfied that such an order should be made but not for the amount sought by the defendant.
3. In light of the relatively straightforward claim, its lack of complexity and the requirements and obligations that the Civil Procedure Act 2005 imposes, in particular sections 56, 57 and 60, I order that the plaintiff respondent pay the amount of $12,000 as security for costs.
4. The proceedings are stayed until that amount is paid.
5. The costs of this motion be costs in the cause subject to any submissions that the parties wish the court to entertain. Magistrate J Keogh 17 March 2016

Endnotes

1. Idoport Pty Ltd & Anor v National Australia Bank Limited & Ors [2001] NSWSC 744 at [59]
2. Global Medical Solutions Australia Pty Ltd v Axiom Molecular Pty Ltd [2013] NSWSC 1433 at [11]
3. East Grace Corporation v Xing (No 1) [2005] FCA 219
4. Global Medical Solutions Australia Pty Ltd v Axiom Molecular Pty Ltd [2013] NSWSC 1433 at [9]; Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [30]
5. Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [31]-[34]
6. In the Matter of Elsmore Resources Ltd [2014] NSWSC 1247 at [16] DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 July 2016