Great Barrier Reef Yacht Club Villas Pty Ltd v Insurance Australia Ltd

The defendants made an application under r 670 Uniform Civil Procedure Rules 1999 for security for costs. The central issue was whether the defendants were able to satisfy the prerequisite under r 671 that there is a reason to believe that the plaintiff, a corporation, will be unable to pay costs if unsuccessful. It was not in dispute that the plaintiff has no assets or lines of credit. The only method by which the plaintiff could pay any adverse costs order is through an administrative fund which would require additional levies to be charged to lot owners who are shareholders of the plaintiff company. Her Honour held that the plaintiff’s asserted right against those third parties does not overcome the fact that the plaintiff is otherwise unable to realise assets for a price sufficient to pay the anticipated costs. In the circumstances there was reason to believe the plaintiff would be unable to pay the defendants’ costs if ordered to pay them. Accordingly, the application was granted.

Wilson J

20 December 2024

Background

The Great Barrier Reef Yacht Club Villas is a development on Hamilton Island comprised of 36 lots. These lots are leased by Hamilton Island Enterprises Pty Ltd from the State of Queensland under a perpetual lease. [5].

The plaintiff sub-leases one of the 36 lots. [6]. This lot contains the common areas for the other 35 lots such as a communal car park and a swimming pool. [7]. Each of the remaining lots have a luxury villa construed on each of them. [8]. The 35 lots are sub-leased to third-parties for residential or holiday accommodation. [9]. Each villa owner receives 10 of the 350 shares in the plaintiff. [10]. The plaintiff conducts itself as far as possible as though it were a strata body corporate for the 36 lots including raising levies, maintaining administrative and sinking funds and taking out a “residential strata insurance policy” with CGU Insurance Ltd. [10]–[11]. This insurance policy was later transferred to the first defendant. [11].

Cyclone Debbie extensively damaged the 36 lots on 28 March 2017. [11]. The plaintiff made an indemnity claim under the insurance policy for the damage which was accepted. [12]. The first defendant approved the second defendant to perform building works to rectify the damage to the villas in an amount exceeding $20 million. [13]. A dispute has since arisen as to alleged defects in the work performed by the second defendant. The plaintiff claims against the first defendant for specific performance of the insurance policy and a breach of s 13(1) Insurance Contracts Act 1984 (Cth). The plaintiff claims against the second defendant for breach of contract made between the defendants, negligence, breach of statutory guarantees and for misleading and deceptive conduct. [14]. The vast majority of the villa owners have assigned all rights they may have against the first and second defendant to the plaintiff. [16].

Her Honour noted that an application for security for costs requires a three-step inquiry, being:

(1)is the jurisdiction enlivened by there being a reason to believe a plaintiff will not be able to pay the defendants’ costs (“threshold question”);

(2)should the court exercise its discretion having regard to the factors outlined in r 672 (“discretionary issues”); and

(3)if the answer to the first two inquiries is in favour of the applicant, what quantum of security should be ordered (“quantum”).

Threshold Question

The main issue was whether one of the prerequisites in r 671, specifically r 671(a), had been met to enliven r 670. Rule 671 relevantly provides:

“671Prerequisite for security for costs

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

(a)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; or ….” [146].

This requires a consideration of whether there is a rational basis for the requisite belief that the plaintiff will be unable to pay in the future the costs of a defendant and a formation of an opinion as to the financial position of the plaintiff at the time of judgment or immediately thereafter. [51]. Her Honour found that a corporation is unable to pay an adverse costs order at the time of judgment if it can only do so if allowed extended time to realise assets, even if this would result in a surplus of funds. [56].

It was not in dispute that the plaintiff did not have any lines of credit and had no assets aside for some small amount of cash. [63]. It was common ground the plaintiff would need to levy its members, the 35 lot owners, to pay any adverse costs order. [64]. Her Honour conducted a detailed review of the relevant cases regarding security for costs when a levy is required to pay an adverse costs order. [65]–[110]. It was observed at the outset that the cases were not consistent. The specific facts and circumstances of each application were the decisive factor. [72].

Her Honour then turned to the specific circumstances of the plaintiff. The plaintiff’s constitution allowed the administrative fund to pay for legal expenses. [152]. Legal expenses were not covered by the sinking fund. [154]. An undertaking was provided by the plaintiff to take steps to raise special levies under the administrative fund and to recover from any member who refuses to pay. [155]. No undertaking was provided by the members. [157]. However, her Honour found that this only guarantees a process to be undertaken but does not guarantee an outcome that the costs would be paid. [159]. There was no evidence as to the financial worth of the 35 members, whether they would remain members, whether they would be able to pay the levies or if the villas would be owned by new members by the time of judgment. [160]. Three villa owners had already refused to pay special levies for the proceeding. [164]. The plaintiff had not taken action against these three members for commercial reasons. [165]. Accordingly, the evidence demonstrated that there was no actual guarantee the levies would be paid. [167]. Further, it would ultimately be the defendants who would bear the burden of time if the plaintiff would be required to pursue any non-paying villa member. [168].

The plaintiff pointed to its past history of having a surplus of funds to demonstrate that it had a healthy state of financial affairs. [174]. Her Honour conducted a review of the administrative fund and sinking fund separately which demonstrated the administrative fund has been in deficit for the last few years. [178]–[192]. There was no power for the sinking fund to pay legal fees. [193].

Ultimately, her Honour found that the plaintiff will not be able to realise assets for a price sufficient to provide a surplus over other liabilities sufficient to pay costs if unsuccessful. An asserted right against third parties, such as to raise levies, does not provide a sufficient answer to this deficiency. [202]. Her Honour followed the approaches in Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40-574, Re Eastmark Holdings Pty Ltd [2015] NSWSC 2071, The Owners – Strata Plan 64415 v Serman [2017] NSWSC 806 where, despite having an ability to raise levies, the plaintiff should be found to be without sufficient assets to meet the liability occasioned by a costs order in the absence of some step taken to alleviate the difficulties a defendant may have beyond an undertaking which does not guarantee an outcome. [203]. The threshold question had been met.

Discretionary Issues

Rule 672 sets out non-exhaustive discretionary factors to award costs. [206]. Factors which weighed in favour of granting security were:

(1)the plaintiff was suing for the benefit of the villa owners. No personal security was being offered by the villa owners. [209].

(2)the financial position of any future villa owners is unknown. [213].

(3)there was no evidence as to the financial position of current villa owners. [217].

(4)the funds held by the plaintiff were dwindling over time and is meagre in comparison to the cost estimate of the defendants. [220].

(5)the plaintiff has no real or other property of any realisable value. [220].

(6)the defendants have no rights of execution in respect of the plaintiff’s “asset of value”, being the alleged entitlement to require members to put in it funds by levies. [224].

(7)the application had been brought promptly. [266].

(8)there was no evidence that security would be stifling. [267].

The plaintiff submitted its case was strong against the defendants which favoured against granting security. [231]–[232]. Her Honour was not prepared to go into the potential merits of the plaintiff’s claim against the defendants due to its complexity, the substantial expert evidence required and the fact pleadings had not closed. [254]. The full mix of considerations favoured granting the security. [269].

Quantum

Her Honour observed the ordinary approach to determine quantum of security is to forecast the recoverable costs to which the plaintiff is exposed by an adverse costs order and to discount below that amount to a sum that represents a fair and proper security against the risk of non-payment in all of the circumstances. [273]. The onus rests on the defendant to put on evidence for quantum. [274]. It was further observed the appropriateness of guarding against the risk of over-estimation of costs which reflects the idea that the proceeding may end before a trial. [276]. Accordingly, her Honour found security should be provided up to mediation rather than trial with liberty to apply if mediation does not occur or is unsuccessful. [278]–[279].

No submissions were provided by the plaintiff as to past costs which the defendants sought security. [284]–[285]. The parties estimated quantum for future costs were close. [286]. Her Honour proceeded on the plaintiff’s estimate as it was more conservative. [287]. The total security to be paid was calculated by the plaintiff’s calculation for future costs, the defendants’ calculation for past costs and then a 25% discount applied to both to take into account uncertainties of litigation. [288]–[290].

Disposition

The Court ordered the plaintiff provide security in the sum of $437,549 for the first defendant’s costs and $863,898 for the second defendant’s costs to be paid within 28 days with liberty to apply. [314].

T Randall of Counsel