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Feeling insecure? Navigating the security for costs process

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By Alicia Hill, Principal and Lee Filkin, Lawyer

The security for costs mechanism in the court system provides for situations where a plaintiff, being the party who initiates proceedings, may have insufficient finances to meet an adverse costs order made against them in the event that their claim is unsuccessful.

In these circumstances, the Court has the power to order the plaintiff to pay a sum into the Court’s account; this sum will be retained until the resolution of the proceedings, at which time it will either be returned to the plaintiff if they are successful or applied to the costs payable by plaintiff if they are unsuccessful.

A defendant to proceedings can make an application to the Court seeking that an order for security for costs be imposed against the plaintiff, or the Court can make this order on its own motion.

It is important to note that this type of order can also be imposed against defendants that bring a counterclaim against a plaintiff in proceedings, as in counterclaims the defendants become the party bringing an action. For ease of reference, the party against whom a security for costs application is being made will be referred to as “plaintiff” within this article.

There are two tests which the Court will apply in considering whether to grant an order imposing security for costs.

The Threshold Test

If the Court has reason to believe that the plaintiff is impecunious (or will not be able to pay the defendant’s costs if the defendant is successful) the Court may require the plaintiff to pay security for those costs and stay the Proceedings until this security is given.

It is not enough for a defendant to simply speculate that the plaintiff may be insolvent; the defendant must provide credible testimony that the plaintiff would be unable to pay the costs of the defendant if the defence is successful. This means that there must be cogent evidence of the plaintiff’s inability to pay, and the burden on proving this lies on the defendant.

Generally, it will not be appropriate to order security if the Court is satisfied that the plaintiff has assets within the jurisdiction which will remain available to meet the defendant’s costs if the plaintiff is unsuccessful in its claim. In considering whether the plaintiff has assets of this nature, the Court may consider the value and nature of the assets, whether the assets are of a fixed and permanent nature and whether the Court is able to ensure that the assets will not be dissipated.

This consideration will be made easier where the assets in question are owned by the plaintiff itself, but in many cases a plaintiff company will hold limited assets. In seeking to defend an application for security for costs in these circumstances, a plaintiff company could provide financial documentation and other evidence demonstrating the plaintiff’s solvency, some examples of which could include:

  1. receipts for payments consistently made on the plaintiff company’s behalf;
  2. proof of assets of a plaintiff company’s directors and an undertaking that these assets will not be dispersed or otherwise dealt with except in relation to the conduct of the proceedings until the resolution of same; and
  3. an undertaking from a third-party guaranteeing payment of any costs order that may be issued against the plaintiff.

Even if the plaintiff’s argument is unsuccessful and the threshold test is found to be satisfied, this does not oblige the Court to make an order requiring the plaintiff to provide security for costs. Rather, it only gives the Court jurisdiction to exercise its discretion, meaning it is allowed to make the order if it chooses to do so. This leads to the Court’s consideration of the Discretion Test, discussed below.

The Discretion Test

The Discretion Test is fairly fluid and open-ended, as the Court will have regard to the particular facts of each case in making a decision as to whether security for costs is required, rather than considering a strict set of rules. However, case law provides factors and guiding principles that the Court may take into account in making this decision. Each of these factors is considered below.

Factor Explanation
The plaintiff’s prospects of success

 

The Court does not afford a great deal of weight to this factor. As long as the plaintiff’s claim is regular and discloses a cause of action against the defendant, the Court will proceed on the basis that the plaintiff’s claim is bona fide (meaning “genuine”) and with reasonable prospects of success.
Whether requiring the plaintiff to provide security would prevent the plaintiff from pursuing a legitimate claim

 

If a plaintiff can demonstrate that an order requiring payment of security for costs would prevent (or “stultify”) the plaintiff’s ability to bring their claim, this will weigh against the Court granting such an order.

Arguments made in relation to this factor will necessarily conflict with those made in relation to the threshold test as discussed above; evidence of plaintiff assets or ability to pay will demonstrate that an order for security for costs would not be an impediment to the plaintiff bringing a claim. As such, it may be necessary to exercise forensic judgment in deciding which argument to run to avoid conflicting positions.

Whether the plaintiff’s financial difficulties were caused by the defendant

 

Where a plaintiff’s claim is based on financial loss or damage caused by the defendant, or the defendant’s adverse conduct can otherwise be seen to have caused financial ramifications for the plaintiff, this will weigh against a security for costs order being made against the plaintiff.

However, recent case law since the emergence of COVID-19 has indicated that, where a downturn in a plaintiff’s business can be attributed to lockdown restrictions or other COVID-related economic issues, the Court will be less likely to find that the company’s financial difficulties are caused by the defendant.

Whether the plaintiff’s claim is merely defensive against self-help measures taken by the defendant

 

This factor applies where the defendant is the “aggressor” in proceedings, that is, where the plaintiff has no choice but to institute proceedings in order to protect themselves against the defendants’ adverse conduct. This will require reference to the claim made by the plaintiff; if sufficiently egregious defendant conduct can be made out, this will weigh against a security for costs order being made against the plaintiff.

 

Practical considerations for parties

Plaintiffs may experience a knee-jerk reaction to defend a security for costs application made against them in light of the large amount sought. However, it is important to step back and consider the best practical option in light of all the circumstances. Generally-speaking, there will be three broad options for a plaintiff faced with an application for security for costs made by a defendant:

  1. Option 1: Pay the total amount sought as security;
  2. Option 2: Reject the amount sought and offer to pay a lesser amount; or
  3. Option 3: Defend the application and seek that no order for security be made.

The three options above are listed in decreasing order of the amount of costs which would be incurred by the plaintiff if selected. Although Option 1 would involve a large up-front security payment into Court, this could involve a lower amount of costs being incurred in the long-term than the other options.

That is, rejecting the amount sought and defending the application both involve substantial work being carried out by the plaintiff’s legal representatives, which necessitates further costs being incurred by the plaintiff and further time elapsing before proceedings can continue. By comparison, the work involved in simply accepting a security amount sought by the defendant is relatively minimal.

If the plaintiff has sufficient assets and cash flow to facilitate a security amount being paid into Court, this may be the most cost-effective and time efficient option. Indeed, there are always risks that a plaintiff will be successful in defending an application for security for costs, in which case security would need to be paid in spite of the delay and costs incurred.

Take-aways:

Parties to proceedings should be aware of the considerations made by the Court in deciding whether to grant an order for security for costs, while also having regard to practical implications.

If you are concerned about a plaintiff’s ability to pay a costs order in proceedings, or if a security for costs application has been made against you, we advise that you obtain legal advice to assist you in considering the best approach to take.

If you have any queries about any of the matters raised by in this article, please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au.