Monto Coal 2 Pty Ltd & Ors v Sanrus Pty Ltd & Ors

In this matter the Court of Appeal considered the appropriate test to be applied under r 671(a) of the Uniform Civil Procedure Rules 1999 when considering an application for security for costs. Gotterson JA (with whom McMurdo JA and Boddice J agree) considers the meaning of the phrase “there is reason to believe the plaintiff will not be able to pay the defendant’s costs if ordered to pay them” and concludes that “for a reason to believe that a fact will exist, the objective circumstances must be sufficient to incline the mind towards accepting, rather than rejecting, that the fact will exist”. The judgment also addresses the issue of which party bears the onus of proof and the meaning of “will not be able to pay”.

Gotterson and McMurdo JJA and Boddice J

9 November 2018

This matter concerned an appeal from a decision dismissing an application for an increase in security for costs. Prior to the application, a consent order had been made requiring the plaintiffs to provide security for the defendants’ costs of, and incidental to, the proceeding. [1]. The defendants subsequently applied for an increase in that security by filing an application pursuant to r 671(a) of the Uniform Civil Procedure Rules 1999 (“UCPR”). [2]. That rule provides:

“The court may order a plaintiff to give security for costs only if the court is satisfied—

• the plaintiff is a corporation and there is reason to believe the plaintiff will not be able to pay the defendant’s costs if ordered to pay them…”

The primary judge dismissed the application. [3]. His Honour adopted a two-stage process by which the court considers first, whether it was satisfied in terms of r 671(a), and second, if so satisfied, whether security should be granted having regard to the factors in r 672 of the UCPR. [22]. This two-staged approach was not challenged on appeal.

The defendants appealed alleging, among other things, that the primary judge had failed to apply the correct test for the first stage of the process under r 671(a). [35]. The defendants also alleged that the primary judge had erred in failing to find that there was “reason to believe” that the plaintiff would not be able to pay the defendants’ costs if ordered to pay them. [36].

Gotterson JA (with whom McMurdo JA and Boddice J agreed) began by considering the nature of the phrase “there is reason to believe the plaintiff will not be able to pay the defendant’s costs if ordered to pay them”. [38]. His Honour adopted the reasoning of Macfarlan JA in Cornelius v Global Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301, in which his Honour said:

“The words ‘reason to believe’ acknowledge that on an application for security for costs, as a matter of practicality, a court will not be able to undertake as thorough an examination of the financial position of a plaintiff as it would if an issue as to that arose at a final hearing. Almost inevitably, the court’s assessment will be a preliminary one based on limited materials. Nevertheless, for the power to order security to arise, the outcome of the assessment must be that the court considers that there is ‘reason to believe’ that the plaintiff ‘will be’ unable to meet an adverse costs order. A conclusion that there is a risk that that will, or may, be the case is insufficient.” [41].

Gotterson JA added that “for a reason to believe that a fact will exist, the objective circumstances must be sufficient to incline the mind towards accepting, rather than rejecting, that the fact will exist” (emphasis in original). [43].

The test which had been applied by the primary judge was put in terms of being satisfied that the plaintiffs would not be able to pay the defendants’ costs if ordered to do so. [45]. Gotterson JA inferred that the test applied by the primary judge “required his Honour to be satisfied on the balance of probabilities that the plaintiff companies [would] not be able so to pay”. [46]. This was a more demanding test than required by r 671(a). [46]. Accordingly, the primary judge had erred by applying an incorrect test for the first stage process under r 671(a), with the consequence that the Court of Appeal was required to reach its own conclusion with respect to this threshold question. [47].

In addressing this, Gotterson JA explained that in terms of onus “it is for the applicant to adduce evidence from which the requisite reason to believe may be reduced and also to persuade the court that such a deduction ought to be made.” [49]

As for the meaning of the expression “will be unable to pay” in r 671(a), Gotterson JA stressed that the rule “does not state or imply that a company will be unable to pay unless it has on hand such liquid funds at that date”. [50]. His Honour did, however, cite with approval the observation of von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203, 205 that:

“A corporation ‘will be unable to pay’ the costs within the meaning of the section if it can only do so if given extended time to realise assets which might be difficult to realise, at least at a price sufficient to provide a surplus over the liabilities, sufficient to pay the costs…” [51].

Ultimately, Gotterson JA was not satisfied that there was reason to believe that the plaintiff companies would not be able to pay the defendant companies’ costs if ordered to do so. [61]. Accordingly, his Honour answered the threshold question in the negative, meaning that the discretion to order security for costs under r 671(a) was not enlivened. [61].  

The appeal was dismissed. [63].

J English