The New South Wales Court of Appeal decision in Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302, confirmed the relatively low evidentiary threshold of a party seeking security for costs under section 1335(1) of the Corporations Act 2001 (Cth) (Act) and confirmed that a stay of the execution and enforcement of a costs order can be justified on the grounds that the party awarded the costs order is impecunious.

Background

Before Prestige Pty Ltd (Prestige) had a liquidator appointed, Treloar Constructions Pty Ltd (Treloar) had obtained a judgement against Prestige.

After the liquidator’s appointment, Treloar commenced proceedings pursuant to section 588M(3) of the Act in the District Court of New South Wales against Brian McMillan (McMillan). The claim alleged McMillan had incurred the judgment at a time Prestige was insolvent to recover a debt owed to it by Prestige Pty Ltd (Prestige). McMillan was a director of Prestige.

Her Honour Gibbs DCJ dismissed Treloar’s claim, ordering judgment and costs in McMillan’s favour. Her Honour held Treloar did not prove Prestige was insolvent when the debt was incurred. Treloar appealed Gibbs DCJ’s decision and the costs order against it.

On 21 September 2016, McMillan sought an order pursuant to section 1335 of the Act for security for costs of Treloar’s appeal and a stay of the appeal until such time as security was provided (Security Application).

On 5 October 2016, Treloar sought an order that the execution and enforcement of the costs order be stayed pending the determination of its appeal (Stay Application).

 Security Application

Pursuant to section 1335(1) of the Act, an order for security for costs may be made against a corporation that is a plaintiff (in these circumstances as the corporation was the appellant, it was the plaintiff for the purposes of this section):

“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 (the defendant is) successful in his, her or its defence…”

In considering whether security should be ordered under section 1335(1) of the Act, Beazley ACJ considered a number of authorities, including, Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93, where Maxwell P and Buchanan JA said at [15] and [20]:

[15] “The phrase ‘reason to believe’ is the touchstone of jurisdiction. It requires a rational basis for the belief – and no more… The section [section 1335] requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay?“.

[20] “On ordinary principles, it is for the defendant-applicant to persuade the court that the discretion should be exercised in its favour. In the present case, however, the judge applied the following statement of Jacobson J in Re Insurance Australia Group Ltd v HIH Casualty and General Insurance Ltd (In Liq):

The effect of the authorities is that if an applicant for security discharges the evidentiary burden of showing a prima facie case, there is then an evidentiary onus upon the opponent to satisfy that court that, taking into account all relevant factors, the discretion ought to be exercised against the making of an order“.

In other works  there is a relatively low threshold required to satisfy the Court  security should be ordered.

In this case, Treloar did not submit any evidence in respect of the Security Application. It seemed content to submit that Prestige had not proved Treloar could not pay the costs if unsuccessful.

In circumstances where Treloar had ignored McMillan’s requests to provide proof of Treloar’s ability to meet a costs order estimated to be in the order of $100,000, McMillan relied on the following evidence to establish of Treloar’s inability to pay costs:

1. Treloar had three directors, all of whom were Treloar family members;
2. There were no current property holdings (in New South Wales) in the name of Treloar or its directors;
3. Treloar’s share capital comprised of 100 ordinary shares and it had a total paid-up share capital of $100;
4. Treloar’s sole shareholder was Treloar Holdings Pty Ltd (Treloar Holdings);
5. Treloar Holdings had the same directors as the directors of Treloar;
6. Treloar’s share capital comprised of 100 ordinary shares and it had a total paid-up share capital of $100; and
7. Treloar Holdings shareholders were two Treloar family members, one of who was also a director of Treloar.

Treloar argued that McMillan had not established “a reason to believe” that it would be unable to meet a costs order if it was unsuccessful on its appeal.

Treloar argued that McMillan had established nothing more than a risk that it may not be able to meet a costs order of the appeal, which, as observed by Macfarlan JA in Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at [16], was not enough to justify ordering security.

Beazley ACJ referred to the decision in FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69 where Pidgeon and Owen JJ considered that evidence the Company did not own land together with its insubstantial share capital, was sufficient to give rise to a reason to believer a costs order could not be met.

On the same basis, Beazley ACJ considered that McMillan had satisfied the threshold requirements of section 1335 of the Act and as Treloar had not led evidence of ability to pay, ordered that $75,000 should be paid security for the costs of the appeal.

Stay Application

Separate to the Security Application, Treloar sought an order staying the execution and enforcement of the costs order made by Gibbs DCJ, pending the outcome of its appeal. Treloar argued that McMillan was impecunious and if costs were paid pursuant to the costs order, it was likely that they would be unrecoverable from McMillan.

Beazley ACJ considered the decision in Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 which established the principles in relation to the granting of a stay:

[694] “In our opinion it is not necessary for the grant of a stay that special or exceptional circumstances should be made out. It is sufficient that the applicant for the stay demonstrates a reason or an appropriate case to warrant the exercise of discretion in his favour“.

[695] “…where there is a risk that the appeal will prove abortive if the appellant succeeds and the stay is not granted, courts will normally exercise their discretion in favour of granting a stay“.

In this case, McMillan had earlier conceded that he was impecunious, which was sufficient reason in Beazley ACJ’s view to warrant the granting of a stay of the costs order against Treloar. However, as a condition to granting the stay, Beazley ACJ required Treloar to provide security in respect of the costs awarded by Gibbs DCJ, as there was no evidence that Treloar could satisfy the costs order in the event its appeal failed.

Summary

The case illustrates the relatively low evidentiary threshold a party seeking security for costs under section 1335(1) of the Act is required to meet. It reinforces the importance of providing evidence of ability to pay should an application be made.

The decision also reaffirms the overriding principles applicable to the grant of a stay i.e. to consider what the interests of justice require.  Those interests do not require special or exceptional circumstances before a stay is ordered.

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