Making the order?
35In the recent decision of Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245, Beazley JA (as her Honour then was) discussed the applicable legal principles. Meagher JA agreed with her Honour and published a separate judgement; Barrett JA also agreed with her Honour. It is convenient to set out the whole of the discussion of legal principles at [26] - [35]:
"[26] The Uniform Civil Procedure Rules 2005 (UCPR), r 42.21 provides:
'42.21 Security for costs
(1) If, in any proceedings, it appears to the court on the application of a defendant:
...
(d) that 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 ...
the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given.
(2) Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct.
(3) If the plaintiff fails to comply with an order under this rule, the court may order that the proceeding on the plaintiff's claim for relief in the proceedings be dismissed.
(4) This rule does not affect the provisions of any Act under which the court may require security for costs to be given.'
[27] The Corporations Act 2001 (Cth), s 1335(1) is in relevantly the same terms:
'1335 Costs
(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.'
[28] Both sources of power involve the exercise of a discretionary judgment. In approaching its task in the case of a corporation, the court should adopt a practical commonsense approach to the examination of the financial affairs of the corporation: Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; 20 VR 377 at [15].
[29] The principles governing the exercise of the discretion are well established and are relevantly the same in respect of each source of power: see Livingspring v Kliger Partners at [10]. The party seeking an order for security for costs (who, for convenience I will refer to as the defendant) bears the onus of establishing that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful: see KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; 56 FCR 189; Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972; Pioneer Park Pty Ltd (in liq) v Australian and New Zealand Banking Corporation [2007] NSWCA 344; Prynew Pty Ltd v Nemeth [2010] NSWCA 94.
[30] There is no predisposition to the making of an order: see Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 509; Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 623-624; KP Cable Investments v Meltglow. Once the defendant has discharged the onus of establishing that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful, the onus shifts to the party against whom the order is sought (who I will refer as the plaintiff) to establish a reason why security should not be granted: KP Cable Investments v Meltglow; Equity Access Ltd v Westpac Banking Corporation; Pioneer Park v Australia and New Zealand Banking Corporation; Prynew Pty Ltd v Nemeth.
[31] In Staff Development & Training Centre Pty Ltd v Commonwealth of Australia [2005] FCA 1643, Spender J, at [9], summarised the factors that have been identified in the case law as governing the exercise of discretion, namely:
'(a) The quantum of risk that a costs order will not be satisfied;
(b) Whether the making of an order would be oppressive in that it would stifle a reasonably arguable claim;
(c) Whether any impecuniosity of the applicant arises out of the conduct complained of;
(d) The prospects of success;
(e) Whether there are aspects of public interest which weigh in the balance against such an order;
(f) Whether there are any particular discretionary matters peculiar to the circumstances of the case.'
[32] Delay is also a relevant factor in determining whether an application for security for costs is to be made: Commonwealth v Cable Water Skiing (Australia) Ltd (1994) 14 ACSR 760 at 762; Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 at 71; KP Cable Investments v Meltglow. However, delay is not of itself a disentitling factor: see Bryan E Fencott v Eretta; Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114.
[33] If the plaintiff's adverse financial circumstances are alleged to be due to the effect of the defendant's alleged conduct subject of the claim, the plaintiff bears the onus of establishing the adequacy of its financial position before the dealings with the defendant and that the defendant's conduct either caused, or at least materially contributed to, the plaintiff's inability to meet an order for costs: see Fiduciary v Morningstar Research [2004] NSWSC 664; 208 ALR 564 at [100]; Jazabas Pty Ltd and Ors v Haddad and Ors [2007] NSWCA 291. Further, where the plaintiff's claim is based upon a loss of profit, the court will take a more cautious approach in its consideration of the cause of impecuniosity than where the claim is based on the infliction of damage: Fat-sel Pty Ltd v Brambles Holdings Ltd (1985) 3 ACLC 312; ATPR ¶40-544 at 46, 428; Jazabas v Haddad at [33].
[34] There is a further matter to which reference should be made. In some cases, persons who stand behind a plaintiff corporation, or who otherwise stand to benefit from the litigation, may offer to be responsible for the costs. Should that occur, it may provide a reason for the court to exercise its discretion in a plaintiff's favour and not order security: see KP Cable Investments v Meltglow; Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306; Prynew v Nemeth at [33]-[45].
[35] In the present case, it is apparent that Amir Harb and Habib Harb stand to benefit should the litigation be successful. However, neither have offered to be responsible in the event a costs order is made against LBC. In any event, on the evidence, they would not have the financial capacity to be responsible for the costs."
36Applying those principles to the evidence in this matter, I make the following findings.
37First, due to the concession, it is established that there is reason to believe that GAP will be unable to pay the costs of Vero Insurance if ordered to do so. Quite apart from that, applying a commonsense approach to the question of the financial affairs of GAP, I would come to the same conclusion.
38That matter having been established to my satisfaction by Vero Insurance, I am not satisfied that GAP has discharged the onus of establishing a reason why security should not be granted against it. It follows that an order for security for costs should be made.
39Turning briefly to the matters that have informed my discretionary decision, for convenience I shall deal with them slightly out of the order in which they were discussed in the judgment of Beazley JA.
40I consider that the risk is not insubstantial that a costs order would not be satisfied.
41I do not consider that it has been established that the lack of funds of GAP is a result of the conduct of Vero Insurance in not complying with a request to pay out on the contract of insurance. As a matter of principle, it would be rather circular if the resistance on the part of the defendant to a claim by a plaintiff could of itself be called in aid by the plaintiff in defeating an application for security for costs. In any event, it has not been established by the evidence that the financial troubles of GAP arose from the position of Vero Insurance.
42Senior counsel for Vero Insurance referred to the decision of Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542. He submitted that that case supports the proposition that, in an application for security for costs, the failure to pay out under an insurance contract cannot be relied upon in itself to resist such an application. The solicitor for GAP invited my attention to differences in the facts between that case and this case.
43I agree that the facts in that case were rather more adverse to the plaintiff than the facts in this case. But, as I have said, it is not the case that it has been established by GAP that the financial troubles of GAP have been caused solely, or even substantially, by the refusal of Vero Insurance to pay out under the contract of insurance.
44As for the prospects of success of the claim of GAP, on the evidence before me those are impossible to determine. I am certainly not satisfied that the proceedings brought by GAP are a sham or doomed to failure.
45I do not consider that there are aspects of public interest that would argue for or against my discretion to make an order for security for costs.
46Nor do I consider that there are any peculiar discretionary matters that arise in this case. As I have noted, it is conceded that there was no delay in bringing the application.
47I turn to the question of whether or not an order could stifle a valid claim.
48The existence of a related third party (be it director or shareholder) who is willing to provide a guarantee or indemnity for an impecunious corporate plaintiff acts as a discretionary factor tending towards the granting of security for costs. In other words, the absence of such a third party may argue against the making of such an order. However, it is not a determinative factor, and its weight will need to be decided on a case by case basis.
49As was said in Yandil Holdings Pty Ltd v Insurance Co of North America at 545:
"[T]he mere fact that the plaintiff is financially unable to provide security does not lead inevitably to the conclusion that the making of an order will stultify the plaintiff's claim. There is a line of authority, commencing with the unreported decision of Yeldham J in Tullock v Walker (8 December 1976), standing for the proposition that if the personnel behind the corporate plaintiff, or other parties who will benefit if the plaintiff succeeds, are financially able to provide adequate security then it is, generally speaking, inappropriate to refuse an order."
50I consider that the rationale for this principle is that, where there is a person who will benefit from the litigation, that person ought not be permitted to hide behind an impecunious company in order to avoid an adverse costs order.
51In the case of a director or shareholder being impecunious and therefore unable to meet any order for security, stultification becomes an important consideration. The effect of stultification has been described by Clarke J (as his Honour then was) in Yandil Holdings Pty Ltd v Insurance Co of North America in these terms:
"The fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour."
52The courts are, unsurprisingly, slow to restrict a plaintiff's right to argue a reasonable cause of action on the sole ground of impecuniosity. Where an order for security for costs would have the effect of stultifying the plaintiff's case, a court would be slow to grant that order.
53However, it is important to bear in mind that it is not for the party seeking the order to show that an order for security for costs would not stultify the plaintiff. To the contrary, once the "threshold question" has been answered by the defendant, it is the plaintiff that must demonstrate that the order would in fact stultify its cause of action. As Einstein J said at [66] in Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744:
"As to [stultification], the plaintiffs bear the onus of proving the factual substratum to make good the relevant assertion. Notwithstanding the fact that neither Idoport nor Market Holdings have themselves the capacity by reference to their own assets to provide security and to continue funding the litigation, the plaintiffs appear to have recognised, and in any event the Court holds, that in failing to call the necessary evidence to establish what are the assets of shareholders or creditors of the plaintiffs or of persons or companies with whom the plaintiffs have funding arrangements or agreements, the relevant evidentiary onus was not discharged."
54It is therefore necessary for the plaintiff to adduce evidence of its inability to meet any security for costs that may be ordered against it before it can rely on stultification as a "powerful factor" against making the order.
55It will be recalled that, in this case, no evidence has been presented as to the financial position of those who "stand behind" GAP. Nor is there evidence about their readiness or otherwise to directly or indirectly provide security for costs to Vero Insurance. The exception to that proposition is the evidence led by Vero Insurance that Mr Bega presented his own bankruptcy petition. In particular, there is no evidence as to the financial circumstances of the sole shareholder MAP, and whether or not it can provide any security.
56Applying the relevant principles with regard to this question, and focusing in particular on the onus falling upon GAP, I determine that, although there is some risk of stultification of a valid claim, that should not lead me to refuse to make the order. GAP has not discharged the onus of persuading me that I should not make the order on this basis.
57Finally, as I have said, senior counsel for Vero Insurance invited my attention to the principle in the "two plaintiff" cases referred to by Brereton J in Street v Luna Park Sydney Pty Ltd. There is no need for me to embark upon a detailed analysis of that rule, because I am satisfied, for two reasons, that it should have no application here.
58The first reason is that this is not a case where security for costs is being sought against a plaintiff corporation and the other plaintiff is an individual. Here, the two plaintiffs are both corporations.
59The second reason is that, although there is no court order for security for costs against Solarus, there can be no dispute that Vero Insurance has de facto security for costs against Solarus as a result of its agreement with Westpac. I have no doubt that, if such an agreement had not been forthcoming, Vero Insurance would have pursued such an order against Solarus, and may well have been successful.
60In the circumstances of this case, I am satisfied that the rule does not stand in the way of the relief sought by Vero Insurance.
61In short, taking into account all of the relevant considerations, I am satisfied that, as a discretionary matter, an order for security for costs in favour of Vero Insurance should be made against GAP in the circumstances of this case.