What to do when a shell company sues you?

Date: July 31, 2016
Author: admin
Posted in: Insights

Practice/s:

In the recent case of Aquatic Air Pty Ltd v Siewert [2016] NSWCA 130 the court considered a number of reasons as to whether security for costs should be granted in a situation where a plaintiff may not have the funds to pay costs to the defendant. A common tactic by shell companies is to launch litigation with little risk, as often they will not have the funds to pay the defendant if they are ordered to pay costs. Security for costs can be an important tool in preventing vexatious litigants and unwarranted litigation by ensuring plaintiffs have to provide funds guaranteeing that defendant’s costs will be paid.

Under s1335(1) of the Corporations Act (2001) a court is entitled to order security for costs, “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 successful in his, her or its defence” and can “stay proceedings until the security is given.” Defendants have much to lose in litigation against a shell company with no assets, as defendants run the risk of a shell company declaring insolvency and thus unable to cover their costs. A successful way to avoid this situation is for the defendant to apply to the court for an order that the Shell Company or vexatious litigant provide security for costs directly to the court. Security for costs is helpful in avoiding aggressive legal fees by the other side as they run the risk of having to cover not only their fees but the defendant’s if they are unsuccessful in litigation.

In Aquatic Air Pty Ltd v Siewert, a primary judge found in favour of Siewert after a seven day hearing which was subsequently appealed by Aquatic. Unsure that Aquatic had the funds to pay them, Siewert made an application under s1335 of the Corporations Act 2001 to the court arguing that they believed Aquatic would not be able to pay their legal costs if Aquatic was unsuccessful in its appeal. Aquatic argued as part of orders at the first instance they had already provided security for $60,000 which was “ample security for costs,” and they should not be required to provide any more security.

However, Justice Macfarlan of the NSW Court of Appeal rejected this argument on the basis that the evidence of a solicitor employed by Siewert had testified that “presently unassessed costs incurred by them at first instance far exceed that figure.” In addition, Aquatic had referred to itself in its submission as “financially cash strapped” albeit “due to the inappropriate and misleading conduct” on Siewert, once again indicating that they may not have the funds to pay if costs were awarded against them. While this argument was unsuccessful, it is interesting to note the logic in Aquatic’s reasoning and the potential for a similar argument to be made in Denham. Justice Macfarlan ordered that $80,000 security for costs provided, “as there is clearly reason to believe that Aquatic will be unable to pay their costs if the appeal fails, and there are no countervailing considerations, security should be ordered.”

This case is important for two reasons. Firstly, it shows that in the future it may be possible to argue against security for costs on the basis that the defendant’s inappropriate conduct has left a plaintiff insolvent. While it was unsuccessful in this case parties may be successful in the future. Lastly, it demonstrates the willingness of the courts to protect the interest of the defendant in a case where they would be greatly disadvantaged if the plaintiff became insolvent and was unable to cover costs.

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