Introduction
The Supreme Court of Queensland has refused security for costs in two related proceedings brought by Chinese investors against an Australian company and its director. The decision is Zhao & ors v CN-AU Capital Pty Ltd & ors; In the matter of CN-AU Capital Pty Ltd ACN 625 191 246 [2025] QSC 290. The Court held that although the jurisdiction to order security was enlivened, the discretionary factors weighed against it. Delay, defensive claims, and strong merits were decisive. The applications were dismissed, with costs against the defendant. This article explains security for costs in Australia and the Court’s reasons.
What is security for costs in Australia?
Security for costs is a court order. It requires a claimant to set aside money (or provide a bank guarantee) to cover the defendant’s legal costs if the claim fails. Courts consider it where cost recovery may be difficult, for example with foreign plaintiffs or asset‑poor companies. In Australia, a threshold must be met (such as foreign residence or corporate impecuniosity). If that threshold is met, the court exercises a broad discretion. It grants security only if fair in all the circumstances, after weighing merits, delay, prejudice, issue overlap, and whether an order would stifle a genuine case.
What happened in Zhao v CN-AU Capital?
The dispute centers on two properties at Carbrook in Queensland. CN-AU Investment Group Pty Ltd acted as trustee of the CN-AU Investment Trust and held mortgages over both lots. The Chinese investors were majority shareholders. Mr Lu was a director.
The investors allege that Mr Lu transferred all net sale proceeds of Lot 2 (about $2.49 million) to himself. They say he later caused Lot 2 to be moved to an associate-controlled trust and took a mortgage over it in his favour. They also challenge steps taken by Mr Lu concerning the company’s directorship, including the removal of one director and the appointment of another.
Two proceedings followed. The first is a “directorship proceeding” seeking declarations to restore proper corporate governance. The second is a “derivative proceeding” brought by the investors on behalf of the company, alleging breaches of directors’ duties and seeking proprietary relief over Lot 2.
Mr Lu sought security for costs in both proceedings. He relied on the investors’ residence outside Australia and the difficulty of enforcing any costs order in China. He also sought security in the derivative claim on the basis that the investors are the real parties behind the company.
When will Australian courts order security for costs?
The Court summarised the two-stage approach under the Uniform Civil Procedure Rules 1999 (Qld) (UCPR). First, a threshold condition must be met under r 671. Second, the Court exercises a broad discretion under r 670 and r 672. The defendant bears the onus throughout.
The threshold was met in both proceedings. The investors are non-resident and have no assets in Australia. In the derivative claim, the investors stand behind the company. However, there is no presumption that security must follow. The Court must weigh all the r 672 factors and ask what the justice of the case requires.
Why did the Court refuse security for costs in the directorship proceeding?
The Court found that the claim is defensive in nature. The investors were forced to litigate to restore corporate governance. They faced ASIC register changes, control of the corporate key, and exclusion from management. This weighs heavily against ordering security.
The merits were assessed as strong. The defense turned on “automatic vacation” of office for non-attendance under the constitution. The Court found the evidence of notice to the removed director to be weak. The COVID period and credibility of the competing accounts mattered. The claim is genuine and seeks declaratory relief to regularise governance.
Delay was significant. Mr Lu first moved in 2023, then let the application lie for over two years without explanation. In that period the investors incurred substantial costs, progressed evidence, and obtained leave for the derivative claim. The delay diminished the weight of non-enforceability and contributed to prejudice.
Non-enforceability within the jurisdiction was acknowledged. But it carried less weight against the combination of defensive character, strong merits, and delay. The Court held that the interests of justice did not warrant security.
Why did the Court refuse security for costs in the derivative proceeding?
The derivative claim alleges that Mr Lu breached duties under ss 181 and 182 of the Corporations Act by directing the company’s sale proceeds to himself and by later securing a mortgage over Lot 2 in his favour. The Court assessed prospects as at least reasonable and, in key overlapping respects, strong.
The case is genuine. The investors had paid funds into court to obtain leave and produced evidence of funds on deposit in China. The company is not shown to be impecunious. It still holds a mortgage over Lot 1, which likely has material value. Even if impecuniosity arose, it would be attributable to the alleged conduct. That factor would reduce the weight of security.
Non-enforceability again favoured Mr Lu. But the strength and defensive character of the claim outweighed it. Delay was less decisive here, but the discretionary balance still favoured refusing security.
How do Australian courts set the quantum of security for costs?
The Court noted substantial overlap between the two proceedings. If security had been ordered, the claimed amounts (exceeding half a million dollars combined) were excessive. A broad reduction of at least half and capping to a mediation stage would have been warranted.
What orders did the Queensland Supreme Court make?
Both applications for security for costs were dismissed. Mr Lu was ordered to pay the costs of both applications.
What are the key takeaways on security for costs and cross-border disputes?
This decision will matter for foreign investor disputes in Australia, including cases involving Chinese parties.
First, defensive proceedings are different. If plaintiffs are, in substance, defending themselves against a defendant’s conduct, security for costs will often be refused. Characterisation is practical and commercial, not technical.
Second, strong merits can tip the balance. The Court will not run a mini-trial. But where the plaintiff shows a bona fide, apparently meritorious claim, that weighs heavily against security, especially where security risks shutting out a proper case.
Third, delays are costly. Defendants must move promptly. Unexplained delays will reduce the weight of non-enforceability and may cause real prejudice to plaintiffs. Late applications are particularly risky where plaintiffs have already undertaken significant steps.
Fourth, non-enforceability is not determinative. The absence of Australian assets and the difficulty of enforcing costs orders abroad, including in China, remain important. But they do not create a presumption. The onus always stays with the defendant.
Fifth, derivative claims require careful analysis. If a company retains local assets, or any impecuniosity is arguably caused by the defendant’s conduct, security is less likely. Evidence of genuine funding support and narrow, defensive relief matters.
Finally, overlap affects quantum. Where multiple proceedings share issues, claimed security must reflect that. Courts will pare back excessive claims and may limit security to early procedural steps.
What does this mean for Chinese law firms and cross‑border clients?
This case offers a clear path for overseas investors seeking governance relief and pursuing recovery where company assets remain in Australia. Plaintiffs should frame claims as defensive where appropriate and assemble early, credible evidence going to notice, authority, and control. Where defendants seek security, challenge delay and press the merits. In derivative suits, identify assets in Australia and the causal link between alleged wrongdoing and any lack of funds.
For defendants, timing is critical. Move promptly. Address prejudice. Calibrate quantum to overlap and likely procedural milestones. Manage documentary control carefully. Unsupported assertions of debts or authority will face scrutiny.
How does this decision fit within Australia’s broader approach to security for costs?
The ruling is consistent with recent appellate guidance that there is no presumption in favour of security once jurisdiction is enlivened. It also underscores that non-enforceability abroad is one discretionary factor among many. The Court’s reliance on practical characterisation, merits screening, and fair process echoes wider trends in case management and interlocutory practice. It also aligns with modern sensitivity to cross-border disputes involving non-English speaking parties and information asymmetry.
Conclusion
Security for costs is a powerful protective tool. But it is not automatic. The Court will ask what justice requires in the specific case. Here, defensive proceedings, strong merits, and serious delay carried the day. The result provides a pragmatic, fair roadmap for cross-border shareholder and directors’ disputes in Australia.
Further Information
For further information about security for costs, cross-border shareholder and directors’ disputes, or claims by overseas (including Chinese) investors in Australia, please contact the author of this article,
