Security for Costs – the impact of Covid-19 and other recent developments

In the current economic climate, now more than ever, applications for security for costs can be of substantial strategic significance in the conduct of litigation. This article explores the discretionary factors which have been considered in a line of recent cases involving security for costs applications and impecunious corporate plaintiffs and highlight strategies that plaintiffs and their advisors may wish to be mindful of in approaching such applications.

The purpose of a security for costs order is to protect the defendant’s entitlement to recover legal costs from an unsuccessful plaintiff. Depending on the jurisdiction of the proceedings, a defendant can apply for security for costs under section 1335(1) of the Corporations Act, section 56(1) of the Federal Court of Australia Act and Rule 42.21 of the Uniform Civil Procedure Rules.

Where a Court orders security, it will commonly be by way of bank guarantee, a deposit of money into Court or by way of an indemnity provided to the defendant. Generally, if a party is ordered to provide security, proceedings will be stayed until the plaintiff provides the security. If the plaintiff fails to comply with the order after a certain period, the Court may dismiss the proceedings. Considering an application for security for costs is a balancing act for the Court; weighing up the detriment faced by a defendant in potentially being unable to recover a costs order in its favour; the financial burden that security would impose on the plaintiff; and whether as a result of that burden, the litigation will be stultified.

This balancing act was recently considered by Henry J in the decision of Grocon Group Holdings Pty Limited v Infrastructure NSW [2020] NSWSC 1194.

The Proceedings

Grocon Group Holdings Pty Limited (Grocon) commenced proceedings against Infrastructure NSW (INSW) in February 2020, alleging misleading and deceptive conduct in relation to the bid process for the Central Barangaroo Development. INSW sought an order that Grocon provide security in the amount of $1,018,395.84 by way of a first tranche and a stay of the proceedings until Grocon paid security in the manner ordered by the Court.

Relevant Law

INSW had the onus of proving the threshold issue that there was reason to believe that Grocon would be unable to pay the costs of INSW if it were ordered to do so. His Honour noted that the  test set a low threshold and required the Court to adopt a practical common-sense approach to the examination of Grocon’s financial affairs[1]. INSW relied on Grocon’s consolidated Financial Reports which showed that by 30 June 2017, the Grocon Group was in financial difficulty. In that year, Grocon Holdings made a loss and had current liabilities that exceeded current assets. His Honour found that despite being in the best position to adduce evidence in response to INSW’s evidence, the Grocon parties largely chose not to do so. His Honour therefore concluded that INSW demonstrated that there was reason to believe that each of the Grocon plaintiffs would be unable to satisfy a costs order in favour of INSW.

Once the threshold question was satisfied, Grocon submitted several discretionary reasons why INSW’s motion for security should be refused, including:

1. Impact of COVID-19 as a factor

His Honour found that the effect of the COVID-19 pandemic on the financial position of Grocon might have militated against an order for security for costs if Grocon’s evidence had addressed the relevant issue and specifically identified what impact it had on its financial position[2].

His Honour distinguished Grocon from the recent decision of Burley J in Hardingham v RP Data Pty Limited[3] where evidence was provided by Hardingham that his business was significantly disrupted as a consequence of the COVID-19 pandemic. In that case, security for costs was not ordered. The plaintiff adduced evidence that if an order for security was made, he would have no alternative but to…