One of the most common grounds for seeking Security for Costs is where a defendant believes the plaintiff will be unable to pay its legal costs.
Does the fact that an Owners Corporation for a Strata Scheme must issue a special levy on its lot owners to cover any expenses it cannot otherwise meet1 mean that any application for security will be unsuccessful?
Perhaps surprisingly, the Supreme Court has diverged in its view of whether an Owners Corporation can reasonably be considered as ‘unable to pay costs … if ordered to do so‘.
While the Court has always recognised the obligations on Owners Corporations to issue a special levy for any costs, and the Owners Corporation’s capacity to enforce contributions from the lot owners,2 it has still been willing to make an order for security for costs where:
- there is objective evidence that lot owners are recalcitrant or unable to pay such a levy within a reasonable time, and
- there is a significant gap between the assets held by the Owners Corporation and the estimated legal costs.
A threshold test to obtain Security for Costs
Rule 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) permits a Court to order security for costs against a plaintiff in specified circumstances.
One common ground for seeking security for costs is where:
“there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so” (UCPR, r 42.21(1)(d)).
This is a threshold test.3 If the defendant cannot produce satisfactory evidence that the corporation will be unable to pay its costs, the Court will not even consider the discretionary factors set out in the rules.
On a number of occasions, the Court has considered whether the powers of an Owners Corporation affect the possibility that it will be ‘unable to pay [costs] if ordered to do so‘.
Presumption that the Owners Corporation can pay
The most recent decision is TC Build4. In TC Build, Ball J considered at  that:
- The Owners Corporation did not have cash on hand to meet any costs ordered against it;
- The Owners Corporation would have an obligation to meet any costs order by making a special levy on the lot owners and a mechanism for recovering unpaid contributions;
- There was no evidence that the lot owners would not ultimately pay such a levy; and
- At most, it may take some time for the funds to be raised to meet the costs order.
In contrast, the Court observed that there was no obvious mechanism to return such levies to the lot owners, if the Owners Corporation was successful.
Balancing these factors, the Court declined to make an order for security for costs.
This judgment was consistent with earlier decisions of the Court.5
Where the lot owners are unwilling or unable to pay
However, the Court has distinguished the approach in TC Build, in circumstances where there is objective evidence that there would be a considerable delay in payment.
In Serman6, the Owners Corporation also had a substantial, net negative asset position and a previous costs order was still being paid by instalments.
The Court pointed out the limitations of the process for making a special levy under the Act. In particular, Walton J observed that there was no fixed period of time in which a notice requiring contributions needs to be issued to lot owners.7 Additionally, a levy may permit payment by instalments.8 Finally, there is the question of how a defendant could make the Owners Corporation issue a levy.9
These factors meant that there was a real question whether costs ordered would be paid ‘within a reasonable time’ and the Court was satisfied that the threshold test had been met.
The State of Play
Applications for Security for Costs against Owners Corporations are difficult to win because of the duty to issue and power to enforce special levies. Despite this, a defendant can pass the threshold, if the defendant can show that any payment is unlikely to occur within a reasonable time.
- 1 Strata Schemes Development Act 2015 (NSW), s.81(4).
- 2 Strata Schemes Development Act 2015 (NSW), s.86.
- 3 Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd  NSWCA 65 at -.
- 4 Strata Plan 94417 trading as The Owners-Strata Plan 94417 v TC Build  NSWSC 1284.
- 5 Owners-Strata Plan No 50530 v Walter Construction Group Ltd  NSWSC 820; Owners Corporation Strata Plan 64970 v Austruc Constructions Limited  NSWSC 778.
- 6 The Owners – Strata Plan 64415 v Serman  NSWSC 806.
- 7 Serman, at .
- 8 Serman, at .
- 9 An issue also discussed by Brereton J in In the matter of Eastmark Holdings Pty Limited (receivers and managers appointed) and 1 Denison Street Holdings Pty Ltd (receivers and managers appointed; In the matter of Eastmark Holdings Pty Limited (receivers and managers appointed) (subject to a deed of company arrangement) & ors  NSWSC 2071.