THE COURT OF APPEAL
Neutral Citation Number:  IECA 147
Finlay Geoghegan J.
[2014 No. 41]
[2014 No. 42]
James Patrick Flannery and Lexington Services Limited
Mortimer John Walters, Brian Connell, Activity Monitoring Solutions, Catharsis Technologies Limited, Ashley Trust Limited and Ashley Nominees Limited
Catharsis Technologies Limited
James Patrick Flannery, Bruce Basheer and Seaf - 2 Limited
Judgment delivered on the 8th day of July 2015 by Ms. Justice Finlay Geoghegan
1. This judgment is given in two separate appeals from a judgment delivered by the High Court (McGovern J.) on the 22nd July, 2014,  IEHC 373 and a supplementary judgment delivered on the 28th October, 2014, determining the amount of the security for costs that would be furnished by Catharsis Technologies Limited (“CTL”) as counterclaim plaintiff.
2. The judgment of the 22nd July, 2014, made decisions on two notices of motions in the proceedings. Firstly the trial judge dismissed an application by the defendants that the plaintiffs furnish security for costs. Secondly, the trial judge directed CTL as counterclaim plaintiff to furnish security for costs in respect of the issues arising on the counterclaim. In his subsequent judgment, he fixed the amount in the sum of €134,406. On the 28th October, 2014, an order was made in the terms of the judgments dealing with the issues of costs of the motions.
3. There are two appeals before this Court: the appeal by the defendants (2014 No. 41) against the order and judgment dismissing their application for security for costs and the appeal by CTL (2014 No. 42) against the order that it grant security in respect of the costs of the counterclaim, against the amount determined and against the failure of the High Court to order that such security be given on a phased basis.
4. Since the making of the orders in the High Court and before the hearing of the appeal, CTL had provided the security ordered.
5. I propose considering each of the appeals separately as different issues arise. I propose firstly considering the appeal of the defendants (2014 No. 41).
Background Facts to Defendants’ Appeal
7. In the High Court and this Court it was agreed that as Lexington was a co-plaintiff of Mr. Flannery and now resident within the EU that no order should be made against Mr. Flannery unless Lexington is considered unable to meet the costs of the defendants if successful. It was further agreed that notwithstanding that s. 390 of the 1963 Act does not apply in its terms to Lexington, that the application against it, which was based upon its inability to pay the costs of the defendants if successful should be determined in accordance with the established principles in relation to applications pursuant to s. 390 of the 1963 Act.
8. Section 390 of the 1963 Act permits the making of an order for security for costs “if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence”. It is not in dispute that the onus is on the applicant/defendants to so satisfy a court. It was further agreed that in considering the evidence before the court, the proper approach is that set out by Murphy J. in the High Court in Bula Limited (In receivership) and Others v. Tara Mines and Others (No. 3)  I.R. 494, where at p. 498 he stated:-
10. The decision and essential reasoning of the High Court judge on the defendants’ application is set out at paras. 7- 9 of his judgment where he stated:-
8. It seems to me that these financial statements show a positive net asset position which is the most relevant consideration in considering the ability to meet a costs order. The company holds approximately €4.5m in assets and the costs of defending the action are estimated at €325,918.40. That evidence has not been challenged to any significant degree.
9. The onus of proof is on the applicants to establish reasonable grounds for the entitlement to the order and to meet the test set out in s. 390 of the Companies Acts. In my view, the evidence adduced does not meet that test, and accordingly, I refuse the defendants’ application for security for costs against the second named plaintiff. Counsel for the defendants accepts that if no order is made against the second named plaintiff, that the position of the first named plaintiff is irrelevant so far as this application is concerned, so I will refuse the application for security against both plaintiffs."
12. The appellants before this Court and (they submitted) before the High Court also relied upon the approach indicated by Clarke J. in the High Court in James Elliott Construction Limited v. Irish Asphalt Limited  IEHC 234, in which at para. 5.2 he held:-
13. At the date of the issue of the defendants’ notice of motion it is common case that Lexington had not filed any accounts as required in Malta. In addition to so stating Mr. Connell, the second named defendant and deponent for the defendants stated at para. 10 of his affidavit that Lexington “previously held only one asset which was a financial interest in loans and shares in West Global Limited (In liquidation)”.
14. The initial response from Mr. Flannery in the first replying affidavit was to indicate that Lexington was then currently in the process of filing its accounts as required under Maltese law and he also exhibited a letter dated the 20th May, 2014, from Lexington’s accountants to its board of directors in which the accountant stated:-
I have been asked by the Directors of Lexington Services Limited to report on the state of solvency of the company. The procedures do not constitute an audit or review in accordance with International Standards on Auditing.
In terms of the request, in my opinion following the approval of the financials as at May 20, 2014 by Silvio Cilia and Rachel Marie Flannery being the directors of Lexington Services Limited I hereby confirm that the said company is solvent and the company will be able to pay its debts that fall due within twelve months.”
16. Mr. Flannery in his next affidavit referred to the fact that Lexington had provided funding to “WEST and West Global Limited in excess of €7,250,000” and has been at the heart of the provision of funding required for the development of the patents in dispute and that at no time previously had any concern been raised by any of the defendants as to the solvency of Lexington or its ability to discharge its liabilities as they fell due. Whilst he did not dispute the failure of Lexington to comply with its filing obligations under Maltese law, he exhibited a report and financial statements as at the 31st December, 2013, which had then been filed and indicated that Lexington’s auditors were also finalising a bi-annual report for the period of the 1st January, 2014, to the 30th June, 2014. A copy of the report and financial statements as at the 30th June, 2014, was exhibited to the affidavit of a solicitor for the defendants sworn also on the 30th June and an indication they were going to be filed in Malta.
17. The hearing took place before the High Court on the 1st and 2nd July, 2014. No further evidence was adduced on behalf of the defendants and there was no expert evidence even on affidavit on behalf of the defendants which commented on the accounts and financial statements produced.
18. Whilst it is correct to observe as submitted by counsel for the plaintiffs that there was no expert evidence given on behalf of the defendants, that of itself does not mean that the defendants had failed to discharge the onus of satisfying the test in s. 390 of the Act of 1963.
19. What an applicant must do under s. 390 is satisfy the court by credible testimony that there is “reason to believe . . .”. The credible testimony which the court is entitled to and should take into account may be testimony produced by either party. On the affidavits before the High Court herein, the relevant evidence which met the threshold of being considered as “credible testimony” were the financial statements of Lexington for the year to the 31st December, 2013 and the six months to the 3rd June, 2014, together with the minimal factual averments of Mr. Connell and Mr. Flannery already referred to. What the High Court was then required to do was to consider, having regard to the submissions made, whether on that evidence the defendants have discharged an onus of satisfying the court that there is reason to believe that the company concerned will be unable to pay its costs.
20. Clarke J. in the Supreme Court in I.B.B. Internet Services Limited and Others v. Motorola Limited  IESC 53 considered how the court should approach such an assessment. He considered in some detail whether a balance of probabilities test was appropriate or not and rejected same following a judgment of the Court of Appeal of England and Wales in Jirehouse Capital and Another v. Beller and Another  1 WLR 751. Clarke J. expressed the view that the phrase “reason to believe” should not be defined further for the reason set out in Jirehouse and to avoid the risk of changing the test and then stated at para. 5.16 of his judgment:-
22. In response counsel for the plaintiffs does not dispute that the court should consider the financial statements in accordance with their terms, but lays emphasis upon the auditors report, the statement of responsibility; the opinion expressed that the financial statements give a true and fair view of the financial position and in particular the note of accounting policies which in relation to impairment it states:-
24. Even in the absence of expert evidence, the financial statements of Lexington for the years to the 31st December, 2013 and six months to the 30th June, 2014, and certain of the statements therein are such that, in my judgment, they required explanation in accordance with the approach of Clarke J in James Elliott Construction Limited and no evidence has been adduced from a director of Lexington. It appears from the Directors Report in the financial statements (which is undated) that the two directors of Lexington who signed the Report and financial statements were appointed on the 12th December, 2013, and the 19th June, 2014, respectively. In accordance with the judgment in James Elliott Construction Limited any uncertainties in the financial statements relating to the ability of Lexington to meet the costs of the defendants if successful should not be resolved in favour of Lexington.
25. I have concluded that without further explanation the financial statements disclose a significant risk that Lexington will not be able to meet the costs of the defendants if successful. In accordance with the judgments referred to above the High Court should consider all the material before it. Accordingly there is on the evidence which was before the High Court, reason to believe that Lexington will not be able to meet the costs of the defendants if successful. The principal reasons for which I have reached this conclusion relate to the following matters in the 2013 and 2014 financial statements.
26. First, the 2013 Director’s Report states that “the main function of the company is to act as an investment holding company and intends to carry on this function. During the period and the first half of 2014, the company concluded the acquisition of a subsidiary”. The only reference to a subsidiary in the accounts is to Summerland Developments SL, the unquoted company registered in Spain. It therefore appears this is the subsidiary referred to. The Financial statements indicate that in 2012 it had no financial assets.
27. Under “Future Developments”, the directors state:-
The amount receivable from West Global Limited in the sum of €7,254,204/USD9,986,140 has been written off in the accounts for year following the liquidation of West Global Limited on the 28th March, 2014. The liquidator is currently carrying out a review of the company’s affairs. This impairment is being considered only on a temporary basis for the moment and may be revised at a future date depending on the outcome of the liquidation process concerning the distribution of assets in the company following the liquidation and, Lexington Services Limited will file amended accounts accordingly. In the meantime the directors have taken a prudent approach and provided for a full impairment.”
29. In my judgment having regard to the above facts a significant concern and question is raised by Note 10 to the financial statements of 2013 which under the heading “Going Concern” and states:-
The company is said to be a going concern if the company is successful in generating profits. However there is no certainty that the company be able to generate profits to continue as a going concern. The company may therefore be unable to continue realising its assets and discharging its liabilities in the normal course of business but the financial statements do not include any adjustments that would result if the company were unable to continues as a going concern.”
31. The last paragraph also raises a serious question in relation both to the ability of the company to continue as a going concern and the adjustments which would result if it were unable to do so, including its ability to realise monies from the investment in the unquoted subsidiary or other receivables from related companies. The financial statements for the first six months in 2014 continue to show a similar picture and repeat the same statements at Note 10. They also disclose that no income or cash was generated from operations. There was no evidence before the court of the ability of Lexington to generate profits and having regard to the statement at Note 10 and the nature of the assets it appears to me that, in the absence of explanations from Lexington the financial statements produced by Lexington can only be considered as indicating a significant risk that it would be unable to pay the costs of the defendants if successful.
32. It follows that as Mr Flannery is not resident within the EU and does not have a co-plaintiff which is considered able to meet the costs of the defendants if successful, that the defendants are entitled to an order for security for costs also against Mr Flannery pursuant to Order 29 of the Rules of the Superior Courts.
33. Accordingly, I would allow this appeal and make an order that the plaintiffs provide security for costs.
34. I would hear the parties as to the further consequential orders to be made, including, in relation to fixing the amount of the security. There is a significant dispute on the affidavits in relation to the amount and it appears to me that, unless the parties agree the amount, this is a matter which should probably be remitted to the High Court for determination.
Appeal of CTL
36. CTL is a company incorporated in Malta. The application for security for costs is brought pursuant to O. 29 of the Rules of the Superior Courts. As it is resident within the EU it was and is agreed, correctly in my view, that the only basis upon which an order for security should be granted is if the test in s. 390 of the Companies Act 1963 is met. That aspect of the position of CTL is similar to that of Lexington.
37. There are four issues in this appeal, which I propose considering in turn. The first is whether in accordance with what are the agreed principles in relation to an application for security for costs against a counterclaimant the trial judge was correct in his determination that the nature of the counterclaim being pursued by CTL against the counterclaim defendants was such that the court had discretion to make an order for security for costs.
38. There is no real dispute about the principles to be applied it is rather the application of those principles to the facts. It is not suggested that the approach in this jurisdiction differs from that in England and Wales and the Court was referred amongst others to the judgments of Vaughan Williams L.J. and Farwell L.J. in New Fenix Compagnie Anonyme D’Assurance de Madrid v. General Accident Fire and Life Assurance Corporation Limited  2 KB 619, which are considered to set out the relevant principles. As appears from those judgments the starting point is that an order for security for costs will not be made against a defendant residing out of the jurisdiction. However, where a defendant either sets up a counterclaim or brings a cross action, then the court may have jurisdiction to make an order for security for costs. In general, no order will be made against a defendant who is simply setting up a claim by way of defence to an action. However, as put by Vaughan William L.J. a p. 625, “One must look in each case to see whether in substance the claim set up by a defendant is set up by him by way of defence to the claim against him”. Later at p.625, he stated positively what should be considered by a court on such applications:-
41. The conclusion of the trial judge in applying the above principles was that he had jurisdiction to make an order for security for costs against CTL. His stated reasons were that the counterclaim joins additional parties to the proceedings and raises new claims raising new legal and factual issues going beyond the defence of the plaintiffs’ claim.
42. I agree with the conclusion of the trial judge that CTL in joining two additional defendants to the counterclaim has taken up the position of a plaintiff in respect of those persons. Further insofar as those added counterclaim defendants, Mr. Basheer and Seaf-2 Limited (“Seaf”) are concerned all the claims made against them are new claims in the sense they are not parties to the plaintiffs’ proceedings. The claims in conspiracy against Mr. Flannery and Mr. Basheer (including a claim for damages for conspiracy) is a new claim and since Mr. Basheer is not a plaintiff in the proceedings, is one which goes beyond a matter of defence. Similarly insofar as the counterclaim appears to include a claim against Mr. Basheer by reason of alleged breaches of duty when engaged as an adviser to CTL that is also a new and distinct claim in which CTL has set itself up as plaintiff. It is unclear to me whether CTL is pursuing a claim for damages for breach of duty against Mr. Basheer as same does not appear to be expressly claimed notwithstanding that pleas of breach of duty are made and a generic plea of loss and damage by CTL “by reason of the matters aforesaid” is made.
43. Accordingly I would uphold the trial judge’s decision that on the facts herein having regard in particular to the addition of new counterclaim defendants and the claims made against them that CTL has taken up the position of plaintiff in addition to the defence to the plaintiffs’ claims such that the court may make an order for security for costs against it, if the other relevant criteria are met. Throughout the submissions, the counterclaim defendants were considered collectively and no submission was made that there should be any different treatment given that they are collectively represented, if successful there will be only one order for costs and one order for security was sought.
44. The second issue relates to the trial judges conclusions in relation to s. 390 of the Companies Act 1963. As with Lexington, in the previous appeal, it was agreed that the relevant test to be met by the counterclaim defendants is that in s. 390 of the Companies Act 1963, notwithstanding that CTL is registered in Malta. It was also agreed that a prima facie defence had been made out.
45. CTL is a company established to exploit the patents the ownership of which is in dispute in the proceedings. The shareholding in CTL is also in dispute. CTL does not appear to have filed accounts in Malta. The evidence of the financial situation of CTL before the High Court was principally a one page statement of financial affairs as at the 31st December, 2013, exhibited by Mr. Connell the second named defendant who is a director of CTL and who made an affidavit on its behalf in response to the application for security for costs by the counterclaim defendants and the grounding affidavit of Mr. Basheer. Mr. Basheer deposed to a “funding requirement document” which was not exhibited by reason of concerns about a non-disclosure agreement entered into by CTL on the 15th January, 2014, but which he deposed indicated that CTL “is clearly insolvent”. He deposed that CTL had failed to file accounts in Malta and that the funding requirement document is the only evidence available in relation to the solvency of CTL.
46. Mr. Connell in his replying affidavit disputes the insolvency of CTL. He exhibits the statement of financial affairs as at the 31st December, 2013. This shows total assets of €533,179 and total current liabilities of €1,011,697. The statement discloses unpaid contributions from Mr. Flannery of €402,602. These are contended to be due and owing by reason of a funding obligation of Mr. Flannery to fund 80% of all costs incurred by CTL. He appears to have ceased providing funding to CTL in June 2013.
47. There was a significant dispute before the trial judge as to whether or not by reason of Mr. Flannery’s funding obligations to CTL it should be determined that the counterclaim defendants had failed to establish by credible evidence that there was reason to believe that CTL would be unable to meet the counterclaim defendants' costs if they were successful. The trial judge accepted the submission made on behalf of the counterclaim defendants that it was an untenable proposition to suggest that the obligations of Mr. Flannery pursuant to his funding obligations (the extent of which are disputed) extended to meeting 80% of costs which might be awarded in favour of the counterclaim defendants against CTL if they were successful in defending the counterclaim brought by it against them. In my judgment it was open to the trial judge to reach this conclusion on the evidence before him. An agreement to fund which included such costs would require very clear wording and there is no evidence of such in the affidavits and exhibits before the trial judge.
48. The second aspect of this ground of appeal related to the position of CTL as disclosed by the financial statements produced. Again it appears to me that on the evidence of the statement of financial affairs, the trial judge was correct on the facts herein in concluding that it provided credible testimony that CTL would be unable to meet the costs of the counterclaim defendants if successful.
49. Accordingly, I would dismiss the appeal against so much of the order and judgment of the trial judge as decided that CTL as counterclaim plaintiff should give security for costs of the counterclaim.
Amount of security
51. The trial judge in his written judgment delivered on the 28th October, 2014, considered carefully the respective submissions and the relevant Supreme Court judgments, in particular Thalle v. Soares & Others  I.R. 182, Fallon v. An Bord Pleanála  2 I.R. 380 and Framus Limited v. CRH plc  2 IR 20, all of which had been referred to by Laffoy J. in Ticket Generator Limited and other than Framus been referred to by Clarke J. in Harlequin.
52. The trial judge had the benefit of one further Supreme Court judgment since the judgment in Ticket Generator. It is a judgment of Clarke J. (with whom Denham C.J. and O’Donnell J. agreed) in Farrell v. Bank of Ireland  2 ILRM 183,  IESC 42. That judgment concerned the grant of security for costs on an appeal from the High Court to the Supreme Court. However, in the course of the judgment Clarke J. refers to Thalle v. Soares (which was an O. 29 case) and Fallon (which was an appeal case) as identifying “a practice which suggested that security in the amount of one third of the costs estimated as being likely to arise should be ordered”. He then stated that it was not clear as to what the origins of that practice may have been and referred to his own judgment in the High Court in Harlequin. Having considered as a matter of principle, the question as to whether the analysis in those cases and that practice should continue, he indicated it should be left over for another case as it was not fully argued. However, he then stated “It is clear that the existing jurisprudence does allow, in an appropriate case, a departure from the so called 'one third rule'".
53. The trial judge herein having referred to the judgment of Murray J. in Framus which was central to the reasoning of Laffoy J. in Ticket Generator, stated:-
10. There seems to be no good reason in this case why the counterclaim plaintiff should be treated any differently than an Irish company would be in similar circumstances, having regard to the fact that I directed security be furnished on the basis of inability to pay the costs of the defendants to the counterclaim if successful in their defence. In those circumstances, I will fix security in the full amount of such figures as I calculate on the basis of the competing sums offered by the legal cost accountants for each party.”
55. The trial judge, it is clear from his reasoning in paras. 9 and 10, did not consider himself bound to make an order for security in the full amount. It was agreed and acknowledged before him that s. 390 in its express terms did not apply to CTL. It is implicit in the opening sentence at para. 10 of his judgment, that the trial judge had regard to the facts pertaining to CTL in these proceedings in reaching the conclusion that it was an appropriate case in which he should order the full amount of the security. The affidavit sworn on behalf of CTL in the application for security for costs before the High Court did not suggest that CTL would be unable to proceed with its counterclaim if required to give such security. On the contrary the contention being advanced was that CTL was solvent.
56. In an application for security for costs where the judge or court has discretion as to the amount of the security to be determined, the balance sought to be achieved should primarily be the balance between the right of a defendant to recover costs if he successfully defends a claim and the right of a plaintiff to have access to the courts or as suggested by Clarke J. in Farrell in relation to an appeal, the right to have litigation fairly conducted. Whilst in this case the trial judge did not expressly refer to such balance, nevertheless it appears to me that he did have regard to the particular factual circumstances of CTL which is part of such balance. Further it was permissible for him to have regard to the position of CTL in comparison with a limited company incorporated in Ireland as it was agreed that the test in s.390 was applicable to the issue as to whether security should be granted. No submission was made on appeal that if the so called ‘one third rule’ did not apply the amount fixed by the High Court was excessive. Finally no case was made that CTL would be prevented from pursuing its counterclaim if security was ordered.
57. In my judgment on the facts before him, the trial judge was not in error in exercising his discretion in favour of making an order for the full amount of what he determined to be a reasonable estimate of the costs associated with the counterclaim on the basis set out in paras. 11 and 12 of his judgment.
58. The final issue was CTL’s contention on appeal that the trial judge ought to have exercised his discretion to make a phased order for security for costs. He did not address this issue in his written judgment. CTL contends that a submission to that effect was made in the High Court in reliance upon the approach taken by Clarke J. in Harlequin. In that judgment he noted at para. 6.2:-
60. Accordingly, I would dismiss the appeal of CTL as counterclaim plaintiff against the judgments and orders made by the High Court.