England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CENTRAL LONDON COUNTY COURT
(His Honour Judge Levy QC)

		Royal Courts of Justice Strand London WC2 Wednesday, 6th February 2002

Wednesday, 6th February 2002

1. LORD JUSTICE BROOKE: This is an application by the respondent, Mr Pyke, for an order that the appellants provide security for costs in relation to the appeal that they are bringing against the order of His Honour Judge Levy in the Central London County Court on 12th February 2001, when he dismissed the claimant's claim against Mr Pyke for damages for breach of fiduciary duty and gave judgment for Mr Pyke on a counterclaim for a sum of about £115,000 together with about £40,000 of interest and ordered the claimants to pay Mr Pyke 85% of the costs of the claim and the counterclaim.
2. The appellants are all in a group of companies. The first appellant was the holding company, and the three other appellants were all subsidiaries. The only evidence until quite recently about the financial affairs of the group emerged from their latest filed accounts up until 31st March 2000, which was nearly two years ago. They were dated 26th January 2001 and filed about a year ago. From those accounts it appeared that the third appellant, Joinery Plus Ltd, was the only trading company in the group - the other non-trading subsidiaries will be dissolved in the near future - and the accountants expressed a fundamental uncertainty about the evaluation of the Group on a going-concern basis for the reasons they explained in their introductory note. So far as Joinery Plus was concerned, their accounts are before the court. Although there was a profit after tax of nearly £600,000 in their trading year, they paid a dividend of £700,000 to the holding company. The balance sheet, although it showed total assets of £1.6 million, showed £1.5 million owed to creditors whose debts fell due within a year and there was a balance in equity shareholders' funds of just under £140,000. So far as the Group accounts were concerned, in that trading year there was a profit after tax of £167,000, and a dividend was paid to Mr Plank, who was, in essence, the sole shareholder, of about £180,000. It has been asserted in the skeleton argument that that was his income for the previous four years. The Group balance sheet as at 31st March 2000 showed total assets of £1.7 million, creditors whose debts fell due within a year of £1.6 million and £324,000 for equity shareholders' funds. I accept Mr Vineall's submission that until recently there was no reason for the respondent's solicitors to make an application for security for costs, because, despite the fact that they lost this litigation, on the latest accounts these companies have filed their financial position looked reasonably sound.
3. It came to Mr Pyke's attention in about the third week of November that joint administrators had now been appointed over the third appellant company, which was the only trading company in the group, and enquiries were made which in due course elicited the fact that an administration order had indeed been made. There was some difficulty in ascertaining exactly what had happened, but by 19th December the position seemed reasonably clear. This application, however, was not made until 25th January, when the respondent's solicitors optimistically estimated that it would take only an hour of the court's time.
4. I have been shown correspondence between the parties. There was a letter from the respondent's solicitors of 13th November 2001 suggesting it would be useful to have up-to-date information about the appellant's financial position, and inviting them, in the absence of such information, to pay the sum of £20,000 costs or to procure a personal guarantee from Mr Plank. That letter received a fairly dusty reply dated 14th November, and on 19th December the appellant's solicitors went again into the attack, having obtained the details of the administration order. They also discovered that callers were being informed that neither the in-house group nor the third defendant were trading and a new company, JPL Joinery Ltd, was trading in their stead.
5. Mr Vineall submits that there is evidence to meet the criteria set out in CPR 25.15(2). There is reason to suppose that the appellants will be unable to pay the costs of the other parties to the appeal should the appeal be unsuccessful. I do not think that proposition is really challenged by Mr Yell.
6. Mr Vineall, in support of his application for costs, has argued that I should treat as neutral the prospects of success. True it is that Robert Walker LJ considered that there is a real prospect of success on the appeal. It has crossed the fairly low threshold. He did not regard it as fanciful. But Mr Vineall argues that it is not very clear that the appeal would win, and he suggests that that factor should be treated as neutral. So far as the timing is concerned, he accepts that the application has come on for hearing close to the appeal date, but he says that there is a reason for that: it took some time to find out the proper position. Once the respondent was alerted to the fact that this was a case in which an application for security might be appropriate, a letter was sent to the administrators of the third appellants on 19th December, and they did not get a reply until 25th January, when this application was put in train. It is submitted that Mr Pyke, as a private individual, who was in a sense a partner with Mr Plank in this corporate business enterprise before they unhappily fell out, had already incurred very substantial costs in defending the action; and, as things stand, he is unlikely to recover the judgment sum he has been awarded or his costs at first instance, and it is unreasonable to expect him to have to incur further expense without security. My attention has also been drawn to an offer that he made long before the trial to pay £50,000 plus costs on the claim for breach of fiduciary duty.
7. An application is now made for just over £23,000 to cover the costs of the appeal. I have been given a breakdown of that sum, which is now slightly reduced, in a witness statement filed on behalf of the respondents. Mr Vineall has drawn my attention to the case of Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 534, in which Peter Gibson LJ made it clear that, before the court refuses to order security on the grounds that it would unfairly stifle a valid claim, the court must be satisfied in all the circumstances that it is probable that the claim would be stifled, and that the onus falls on he who asserts that to show that it is a fact.
8. In the more recent case of Federal Bank of the Middle East v Hadkinson & others, Court of Appeal transcript 5th November 1999, Mummery LJ said at page 8:

"Looking at what has happened so far in this litigation, the position is that the defendants have had no difficulty at all, impecunious though they are, in obtaining funds from third parties to fight substantial applications. This funding is continuing. It is evidenced by the very fact of this appeal.

The defendants are seeking to proceed with their own applications and appeals, with funding from the third parties, without exposing themselves or the third parties to the risk, which is inherent in the rules by which appeals are conducted, of ever having to pay the costs of the other side if their appeal is unsuccessful. Having regard to the history of this matter since February 1998, I am not satisfied, just as Morritt LJ was not satisfied, that the effect of making the order for security will be to stifle these appeals. There is no evidence from the three external funders that they will cease to fund the defendants' costs. But they stick their toes in at having to provide security for the bank's costs.

I would hold on the first point that there was no error of principle by Morritt LJ. The correct view is that it has not been shown that these appeals will be stifled by the order for security for costs. It is important to bear that point in mind when considering the remainder of the grounds of appeal."

9. And on page nine:

"The third point was on the Convention. We were referred, as was Morritt LJ, to the Tolstoy case, particularly at passages on pages 475-477. The decision of the European Court of Human Rights in that case, with regard to the effect of the security order on the impact on the rights of citizens under Article 6, depended on the facts of their case. There are differences on the facts of this case, particularly as regards the prospects of success on the appeal. I would not regard the Tolstoy case as laying down a general rule that no order for security for costs of an appeal would ever breach Article 6.

In my judgment, however, there is no breach of Article 6 in this case. The short reason is that it has not been demonstrated that the appeal will be stifled by making the order for security. The order for security will not be the cause of access being denied to an appeal in this court. I need not repeat the points already made on the stifling point.

Fourthly, Mr McCombe contends (although I think not as one of his best points) that insufficient weight was given by Morritt LJ to the provisions in the CPR relating to the achievement of the overriding objective, of ensuring that parties would be on an equal footing, and that cases should be decided fairly and in ways which are proportionate to the financial position of each party. This point does not assist the appellants. If anything, it is rather against them. In saying that an order for security is inappropriate, they are seeking to argue the appeal on an unequal footing. If the appeal is successful, the normal order would be that the respondent pays their costs. There is no reason to believe that the bank would not be in a position to meet those costs. The defendants wish to be in a more privileged less equal position, as appellants, in that, if they lose the appeal, they should not have to provide security so as to ensure the successful respondent bank will get its costs."

10. Mr Vineall submits, on the basis of those authorities, that there is no evidence that the claim will be stifled. He accordingly asks for the security that his client requests.
11. Mr Yell submits that this application ought to have been made much earlier, that the time estimate of an hour was an unreasonable one and that it is important these days, when the court has to take into account the requirements of Article 6 of the European Court of Human Rights, that the essence of the right of appeal is not stifled once a court has granted access to the court by way of appeal. He places great weight on the decision of the European Court of Human Rights in the case of Tolstoy Miloslavsky v United Kingdom (1995) 20 EHRR 442 at paragraphs 33-43. That was a case in which Count Tolstoy was seeking to appeal against an order for £1.5 million in a libel action, and there be an extensive consideration of the merits of the proposed appeal, not only by the Registrar of Civil Appeals, but also by the full Court of Appeal itself; a matter which impressed the European Court of Human Rights when it considered that application.
12. It is noticeable that in November 1999, when Mummery LJ gave judgment in Hadkinson, he accepted there were differences on the facts of the case, in particular as regards the prospects of success on the appeal.
13. Mr Yell went so far as to submit, in essence, that I ought to go in depth into the merits of the appeal on this application; because he sought to persuade me that his client had a strong case and, if it was a strong case, it was all the more important not to interfere with the essence of his right to place it before the court, given the substantial judgment which had been ordered against it. He also made submissions not only in relation to the merits of the claim but also to the merits of the counterclaim. He submitted that to some extent there is a new regime here where permission to appeal is granted, and the Court of Appeal is not concerned with appeals where nobody has suggested necessarily that there is a reasonable prospect of success. In this case Robert Walker LJ has formed that view.
14. Mr Yell argued that the existence of the administration order precluded this court from making an order for security for costs against the third appellant. He drew my attention to section 11(3)(d) of the Insolvency Act 1986. In my judgment it is the appellant's administrator who is continuing to give his support to these proceedings, and all the court would be doing in these proceedings is to make it clear that he cannot go any further with the proceedings unless a sum is lodged in court by way of security. In my judgment, there is no need for the matter to be referred back to the Companies Court for permission under that section in these circumstances.
15. I do not consider that it is necessary to go in detail (in view of the way that Mr Yell has made his submissions) into the prospects of success on the appeal, in the sense that one has to form a judgment, whether there would be a 70% chance or 90% chance. He submitted his clients had a strong chance of success, and it would make the exercise of this jurisdiction the extremely burdensome and, in my judgment, not particularly just, if a court had to carry out that kind of exercise. I am perfectly willing to accept that the appellant does have at least a 50/50 chance of success, having seen the material which has been put before me. The real question is: should they be allowed to go on with this appeal even if they had a higher chance of success when what I see is a defendant who is unlikely to recover his judgment sum, unlikely to recover the costs ordered in his favour and unlikely to obtain any costs from the appellants should he succeed in beating off the appeal? Mr Yell suggested that there was no obligation on his clients to put any evidence before the court to the effect that an order for security for costs would stifle the appeal and take away the essence of their right. But, notwithstanding the fact that English authority clearly shows that the burden of proof is on appellants who make that assertion (and in my judgment, as a matter of Strasbourg law, there is nothing procedurally offensive about a national court which follows a rule of that kind), I have to deal with the matter on the basis that there is no evidence before me, although there is evidence of the companies' dire financial state.
16. Doing the best I can, the factors I take most strongly into consideration is the very short period of time before the hearing of the appeal, which is fixed, as I understand it, for next Wednesday, and the fact that, so far as the companies are concerned, there is no reason to suppose that there is any money in any of them.
17. I have considered carefully the points made by Mummery LJ on the basis of the Yorke Motors case in his judgment. I do not consider that it would be right in the circumstances to order the whole of the security that the respondents seek, but I see no reason why a small sum of security should not be ordered.
18. What I propose to order is that the appellants pay into court by way of security the sum of £5,000. If that sum is not paid into court by 4.00 p.m. next Monday, the appeal will be stayed.
Order: Application allowed as above. I order the appellants to pay the respondent's costs in the amount of the statement of costs which is before me.