England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Rolls Building, London, EC4A 1NL
		26/03/2013

Mr Justice Morgan:

Introduction

1. On 14^th December 2011, District Judge Obadai in the Manchester District Registry ordered the Defendant to give security for the Claimant's costs, in relation to the Defendant's Counterclaim, by paying the sum of £57,164.00 into court by 28^th December 2011. The District Judge further ordered that all further proceedings on the Defendant's Counterclaim should be stayed until security was given. The Defendant did not provide security as ordered and the Counterclaim has accordingly been stayed since the date of that order.
2. The Defendant has appealed against the order for security for costs. The Defendant says that no order for security should have been made in relation to the Counterclaim. On 30^th July 2012, having considered the matter on the papers, I granted the Defendant permission to bring this appeal.
3. The Defendant's case on this appeal has been presented by Mr Andrew Weston who is an employee of the Defendant and the brother of the sole director and shareholder of the Defendant, namely, Mr Christopher Weston. The Claimant was represented by Ms Anneliese Day QC.

The Civil Procedure Rules

4. CPR rule 25.12 (read together with rule 20.3) allows a Claimant to apply for security for its costs in relation to a Counterclaim brought against it. By rule 25.13, the court may make an order for security for costs under rule 25.12 if it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order and one or more of the conditions in rule 25.13(2) applies. One such condition, in rule 25.13(2)(c), applies where the person against whom security is sought is a company and there is reason to believe that the company will be unable to pay the costs of the person seeking the security if ordered to do so.

The issues

5. There is no issue as to the jurisdiction of the court to make an order for security for costs in favour of the Claimant in relation to its costs of defending the Counterclaim. The Defendant is a company and it is accepted that there is reason to believe that the Defendant will be unable to pay the costs of the Claimant in relation to the Counterclaim, if the Defendant were ordered to do so. The issue which was argued before the District Judge was whether it was just to make such an order having regard to all the circumstances of the case. The Defendant raised a large number of matters on this appeal. Those matters can be divided into three groups, as follows: (1) an issue as to whether the court should decline to order security in relation to the costs of defending the Counterclaim on the ground that the Claim and the Counterclaim raised the same or substantially overlapping issues ("the first main issue"); (2) a number of points which I will consider under the hearing "other matters"; and (3) questions as to whether an order for security would stifle the Counterclaim and, if so, whether that was a sufficient reason for not ordering security ("the second main issue").

The litigation

6. I will summarise the matters which are the subject of the Claim and of the Counterclaim. Between 4^th April 2008 and 20^th October 2008, the Claimant acted for the Defendant as its solicitors and, in particular, the Claimant advised the Defendant and acted for it in relation to claims which the Defendant wished to bring against third parties for the alleged infringement of the Defendant's intellectual property rights. During that period, the Claimant billed the Defendant in relation to its fees. The Defendant appears to have paid only a small sum on account of fees and the Claimant alleges that the sum of £22,429.57 remained unpaid by the Defendant. On 6^th October 2008, the Defendant wrote to the Claimant complaining about the advice and the service provided to it by the Claimant. On 20^th October 2008, the Claimant terminated its retainer by the Defendant on the ground that the Claimant had not paid the fees due to the Claimant and on the further ground that the solicitor/client relationship had broken down.
7. On 6^th January 2009, the Claimant sued the Defendant in the Manchester County Court for fees allegedly due and remaining unpaid in the sum of £22.429.57. On 1^st September 2009, the Defendant served (in an amended form) a detailed Defence and Counterclaim.
8. Apart from a very minor point which it is not necessary to describe, the Defence to the claim was pleaded as a set off of so much of the sum counterclaimed as would wholly extinguish the claim. However, there are paragraphs in the Counterclaim which might more properly have been pleaded by way of Defence. I refer to paragraphs 27 to 29 of the Counterclaim. In paragraph 27, the Defendant pleads that the advice given by the Claimant and the steps which they took were of no value to the Defendant and that the consideration for the Claimant's services had wholly failed. A similar point is made in paragraph 29 of the Counterclaim.
9. In its Counterclaim, the Defendant sets out its version of the history of the Claimant's involvement as its solicitor. The subject matter of the instructions given to the Claimant was the Defendant's alleged intellectual property rights in relation to certain exercise treadmills and a trade mark. The Counterclaim asserts that the Defendant had reasonably good claims, and at least arguable claims, as to infringement of its copyright in relation to certain parts of the controls of the treadmills. It is pleaded that this copyright had been infringed by two competitors, namely, Sport & Leisure and Specialist Performance. It is also pleaded that Sport & Leisure was liable for alleged passing off. Later in the Counterclaim it is pleaded that another competitor, Imperial Teak, was selling a treadmill which infringed the Defendant's trade mark.
10. In its Counterclaim, the Defendant alleges that the Claimant was negligent in relation to the advice it gave the Defendant as to what it could and should do to protect itself against the alleged infringements of its rights. In particular it is alleged that the Claimant should have, without delay, initiated proceedings on behalf of the Defendant and obtained interim relief against the alleged infringing parties and that the Claimant failed to give the right advice or take the appropriate action in this respect. The Defendant pleads that it has suffered very heavy trading losses as a result of the allegedly negligent advice and failure to act on the part of the Claimant. As regards the alleged acts of infringement by Sport & Leisure and Specialist Performance, it is said that these companies continued to sell substantial quantities of treadmills which infringed the Defendant's rights when they should have been stopped from doing so by interim injunctions. It is said that the sales by these third parties resulted in the Defendant losing its own sales. This meant that the Defendant lost substantial revenues and profits and that its business in relation to exercise treadmills all but collapsed. The figures pleaded suggest that the Defendant's losses are of the order of £3.5 million. It seems to be accepted by the Defendant that after October 2008, when the Claimant was no longer acting for the Defendant, the Defendant did not take any steps to pursue Sport & Leisure or Specialist Performance. In that regard, the Counterclaim pleads that the losses which the Defendant suffered meant that it was not in a financial position to pursue its claims against these parties and further it is suggested that Specialist Performance would not have met any judgment obtained against it. In relation to the alleged trade mark infringement by Imperial Teak, it is pleaded that the consequence of the Claimant's negligence was that Imperial Teak continued to infringe the Defendant's trade mark and the Defendant lost a profit of £120,000. It is pleaded that Imperial Teak later went into liquidation and no damages would be recoverable from it on that account.
11. On or about 26^th October 2009, the Claimant served a detailed Reply and Defence to Counterclaim. In particular, the Defence to Counterclaim pleads a large number of detailed matters as to the dealings and communications between the Claimant and the Defendant between April and October 2008. The Claimant denies that it was negligent in any way and further says that the alleged shortcomings on the Claimant's part did not cause any loss to the Defendant.
12. Although the Reply and Defence to Counterclaim was served in October 2009, the action has not really progressed since that time. However, the parties have not been inactive and, in particular, certain matters raised by the Defendant have caused the Claimant to incur legal costs which, in due course, the Defendant was ordered to pay but the Defendant has not paid.
13. In brief summary, when the Claimant filed its Reply and Defence to Counterclaim with the court and served the same on the Defendant in October 2009, the Defendant contended that this pleading was out of time and that it was entitled to enter judgment on its Counterclaim. The Defendant's case was that the Claimant was a few minutes late in filing and serving its Reply and Defence to Counterclaim, in contravention of an unless order made by consent, and that the delay was fatal to the Claimant's ability to defend the Counterclaim. The procedural history in relation to this contention is set out in the decision of the Court of Appeal, which dealt with that matter; the decision is reported at [2011] 1 WLR 2275. In the course of his judgment, Tomlinson LJ said that he would have been astonished if a court had not been prepared to extend the Claimant's time for filing and serving its Reply and Defence to Counterclaim: see at [35]. Similarly, Lloyd LJ said that the case for the grant to the Claimant of a short extension of time was overwhelming: see at [40].
14. In the course of the dispute as to whether the Defendant was entitled to enter judgment on its Counterclaim, the court made three orders for costs against the Defendant. On 19^th August 2010, Judge Hodge QC ordered the Defendant to pay the Claimant's costs in the sum of £8,705. Later, on 25^th March 2011, a deputy judge ordered the Defendant to pay the Claimant's further costs of £1,585. The Court of Appeal ordered the Defendant to pay the Claimant's costs of the appeal, such costs to be the subject of a detailed assessment. The Defendant has not paid anything towards the first two orders for costs. At the time of the hearing before the District Judge, the costs which were the subject of the Court of Appeal's order had not been assessed. Those costs have subsequently been assessed and the costs judge has ordered the Defendant to pay to the Claimant the sum of £29,086.30 (including £9,621.40 as the costs of the detailed assessment). Those costs have not been paid. The Defendant sought a re-hearing of the detailed assessment but this was refused. The Defendant is currently seeking to appeal the refusal of a re-hearing of the detailed assessment.
15. I have considered how to react to the history which I have just summarised as to the Defendant's contention that it was entitled to enter judgment in relation to its Counterclaim. On the face of it, the Defendant was taking an excessively technical point and persisted in the point notwithstanding that it failed on three occasions, i.e. before the District Judge, Judge Hodge QC and the Court of Appeal. Further, the Defendant acted through Mr Andrew Weston at those three hearings and did not incur legal costs of its own but it put the Claimant to considerable expense in dealing with the Defendant's contention. Now that the Defendant has been ordered to pay substantial sums by way of costs to the Claimant, it is clear that the Defendant will not pay any of those costs; it says that it is wholly unable to do so. The Defendant would wish me to take a less critical view of its part in this litigation history. It points out, correctly, that it was given permission by David Richards VC to appeal against the District Judge's extension of time and, further, it was given permission by Patten LJ to appeal against Judge Hodge's decision. Further, Tomlinson LJ said that he could understand why the "appeals have been pursued with such assiduity by a party who was not legally represented": see at [35]. Further, the Defendant emphasises some criticisms by the judges of the way in which the Claimant presented its evidence as to what precisely happened when the Claimant sought to file and serve its Reply and Defence to Counterclaim. Whilst the judgments do contain those criticisms, it seems to me that the Defendant has over-stated the significance of those comments.

The first main issue

16. In its submissions to the District Judge and again on this appeal, the Defendant argued that there was a principle called "the Crabtree principle" which meant that in a case like the present where the Defendant pleaded by way of defence a set off of the damages claimed by the Counterclaim, effectively the same issues arose in both the Claim and the Counterclaim and it would be wrong to order that security for costs must be given by an impecunious Defendant.
17. This submission led to a substantial citation of authority as to the approach which the court should adopt where there was a claim and a counterclaim and the Claimant sought an order that the Defendant should provide security for the Claimant's costs of defending the Counterclaim. The authorities cited (and I will include here the principal authorities discussed in the authorities cited) were Mapleson v Masini (1879) 5 QBD 144, Neck v Taylor [1893] 1 QB 560, The Silver Fir [1980] 1 Lloyds LR 371, B J Crabtree v GPT Communication Systems Ltd (1990) 59 BLR 43, Hutchison Telephone v Ultimate Response [1993] BCLC 307, Shaw-Lloyd v ASM Shipping [2006] EWHC 1958 (QB), Newman v Wenden Properties (2007) 114 ConLR 95, Dumrul v Standard Chartered Bank [2010] EWHC 2625 (Comm) and Anglo Irish Asset Finance v Flood [2011] EWCA Civ 799.
18. I need not discuss these authorities in detail but I will make brief comments on the more relevant ones, first, to identify the principle which is to be applied and, secondly, to refer to those cases where the decision might provide a relevant illustration of how the principle is to be applied.
19. In The Silver Fir [1980] 1 Lloyds LR 371, where there was jurisdiction to order both the claimant and the defendant to give security, that was indeed the order which the Court of Appeal made. At page 374, Lawton LJ analysed the earlier case of Neck v Taylor [1893] 1 QB 560 as a decision to the effect that even in a case where the claim and the counterclaim arise out of the same subject matter there is a discretion to award security for costs but where the counterclaim is nothing more than a defence then normally the discretion is exercised against ordering security in relation to the counterclaim. In Crabtree, Bingham LJ firmly emphasised that there was no rule of thumb as to the grant or refusal of security in a case where there is a claim and a counterclaim. In the event, in that case the court refused to order the claimant to give security in relation to the defendant's costs of dealing with the claim, where the defendant had brought a counterclaim. The court considered what the effect would be of ordering the claimant to give security for the defendant's costs of the claim and ordering a stay of the claim if security were not provided, with the result that the counterclaim alone went to trial. The court asked what was to happen if, as was likely, the issues raised by the claim were investigated in the course of the trial of the counterclaim and it emerged that the claimant was entitled to judgment on its claim. The defendant accepted that the court could then lift the stay on the claim and award judgment to the claimant. The court thought that such a position would be undesirable.
20. In Hutchison, the Court of Appeal reversed the judge at first instance on the ground that he had been wrong to confine his analysis to whether the claim and the counterclaim turned on the same issues of fact, ignoring the overriding discretion which the court had. The court ordered the defendant to provide security in relation to the claimant's costs of a counterclaim where the counterclaim raised additional substantial claims, where the ambit of the claim was very substantially enlarged, where the counterclaim had crossed the boundary which divided an aggressive defence from a counterclaim and where the sum counterclaimed substantially exceeded the amount of the claim. At page 317 c – h, Bingham LJ held that the court had jurisdiction to make an order for security for costs and then said:

"At that point, one moves on to the largely discretionary area. The trend of authority makes it plain that, even though a counterclaiming defendant may technically be ordered to give security for the costs of a plaintiff against whom he counterclaims, such an order should not ordinarily be made if all the defendant is doing, in substance, is to defend himself. Such an approach is consistent with the general rule that security may not be ordered against a defendant. So the question may arise, as a question of substance, not formality or pleading: is the defendant simply defending himself, or is he going beyond mere self-defence and launching a cross-claim with an independent vitality of its own?

It appears to me that Field J put his finger on the appropriate question when he pithily observed in Mapleson v Masini (1897) 5 QBD 144 at 147:

'The substantial position of the parties must always be looked at.'

For my part, I think that no simple rule of thumb exists to determine the answer to the question. An order for security against a counterclaiming defendant is not precluded because the counterclaim arises out of the same transaction as the claim. Otherwise, no order could have been made in The Silver Fir. It is again not conclusive that the counterclaim overtops the claim, although I venture to think that the relative quantum of the counterclaim and the claim is not in all circumstances irrelevant. It is clearly a relevant consideration that, if the plaintiffs had not issued proceedings, the defendants would have done, as in The Silver Fir, because in such a case it may be almost a matter of chance whether a party happens to be the plaintiff or the defendant; and if the proper inference is that the defendants would have sued anyway, that fortifies the inference that the counterclaim has an independent vitality of its own and is not a mere matter of defence."

21. Two cases at first instance, namely, Shaw-Lloyd & Co v ASM Shipping [2006] EWHC 1958 (QB) and Newman v Wenden Properties (2007) 114 ConsLR 95 concerned claims for professional fees which were met by substantial counterclaims for damages for professional negligence. In Shaw-Lloyd the judge applied the approach in Hutchison Telephone. She referred to the disparity in value between the amount of the claim and of the counterclaim, the fact that the counterclaim would give rise to a host of factual inquiries which would not arise in relation to the claim itself, in particular, issues as to causation of loss. It was held that the Counterclaim crossed the boundary between an aggressive defence and an independent counterclaim and security was ordered. In Newman v Wenden Properties, the counterclaim raised a number of issues which had nothing whatsoever to do with the claim or the defence to the claim. It was held that it should be treated as a separate claim and security was ordered.
22. In Dumrul v Standard Chartered Bank [2010] EWHC 2625 (Comm) where there was a claim and a counterclaim, the defendant applied for security for its costs of dealing with the claim. The judge stated that the comparative sizes of the amounts claimed and counterclaimed could be relevant. He also suggested that where an order was made in relation to a claim, the order for security would normally be limited to the costs of addressing additional issues raised only by the claim.
23. Finally, in Anglo Irish Asset Finance v Flood [2011] EWCA Civ 799, there was obiter discussion of the case where there is a claim and a counterclaim. The Court of Appeal would not have interfered with the decision of the judge at first instance to refuse to order the claimant to give security for the costs of the claim in a case where the defendant had gone beyond merely defending the claim but had brought a substantial counterclaim.
24. In the present case, the Defendant contended that if it were ordered to provide security in relation to the Claimant's costs of defending the Counterclaim and if the Counterclaim were stayed in the event that security was not provided then the claim could go to trial and the Defendant would by way of defence to the claim raise all the issues which were pleaded in the Counterclaim. The Defendant would plead a total failure of consideration by reason of the Claimant's alleged negligence and would also claim damages so that its entitlement to damages could be set off against the claim to fees. If the Defendant succeeded with these points, then it would, or at least might, emerge that the Defendant ought to be entitled to judgment on the Counterclaim and the result would be that the stay on the Counterclaim would then have to be lifted.
25. There is some force in the Defendant's submission as to what would happen if the court ordered security in relation to the Counterclaim and the Counterclaim were then stayed. The Defendant's submission relied heavily on the approach taken in Crabtree and the contention that Crabtree laid down a principle which had to be followed in this case.
26. However, in my judgment, as Bingham LJ stressed in both Crabtree and Hutchison, there is no rule of thumb which is to be applied in this case. The other decisions both before and after Crabtree show that the court is concerned to consider whether it is just to make an order for security. The justice of the case will be affected by the considerations referred to in the various cases, such as the degree of overlap of issues between the claim and the counterclaim, the amounts claimed and counterclaimed respectively and an assessment of the substance of the matter by asking whether a counterclaim is in substance a defence or in substance an independent claim. Because the court is concerned to assess the substance of the matter, it is less concerned with more technical matters as to whether a claim is, or can be, pleaded as a set off or can only be asserted as a cross claim. Further, the court is not influenced, or certainly not much influenced by, the fact as to who first sued whom.
27. In my judgment, it is right to regard the Counterclaim in this case as having crossed the boundary which divides an aggressive defence from an independent claim. Whilst there are overlapping issues between the Claim and the Counterclaim, there is not total identity of those issues. Although the court may be required to determine whether any damages payable to the Defendant equal or exceed the amount of the fees which are claimed, the court may well not be required to determine whether the Defendant is entitled to £3.5 million, if the Counterclaim is stayed. Further, the amount counterclaimed is very much greater than the amount claimed. Yet further, in considering whether it is just to order the Defendant to provide security in relation to the Counterclaim, I ask myself what I would do if the Defendant had been the first to sue and the solicitors had then pleaded a set off of their fees in the sum of £22,400 and had also counterclaimed for those fees. I think that I would have had no hesitation in saying that in substance the subject matter of the litigation was the claim to damages for professional negligence and that it was prima facie appropriate to order the party claiming those damages to give security for the solicitors' costs of defending that claim.
28. The view expressed above is essentially the view taken by the District Judge in her judgment. It can be seen that I agree with her view. At the lowest, it seems to me that the view expressed by the District Judge was a view which she was entitled to take. As to the suggestion in Dumrul that a court might in some cases try to identify only the costs attributable to the separate issues raised by the Counterclaim so that only those costs should be the subject of an order for security, this matter was not raised by the Defendant before the District Judge nor on this appeal. Indeed, although the Defendant had a very large number of grounds of appeal, it did not raise any point as to the assessment of the Claimant's costs which ought to be the subject of an order for security. Accordingly, I need not consider whether the suggestion in Dumrul is well founded.

Other matters

29. The District Judge considered a number of other matters before reaching her overall conclusion that it was just to order the Defendant to give security for the costs of the Counterclaim. I will consider each of these in turn before I deal with the second main issue.
30. The District Judge correctly held that it was irrelevant to inquire into the financial position of the Claimant.
31. She then considered whether the Counterclaim was bona fide or a sham. She correctly directed herself that it was not appropriate to go into the detailed merits of the rival cases. She did not decide that the Counterclaim was not bona fide or that it was a sham. However, she did comment on the Defendant's prospects of success on its Counterclaim and she considered that the Defendant had a low prospect of success in that regard.
32. The Defendant submitted to me that it had a very high prospect of success on liability and a similarly high prospect of success in recovering substantial damages. It was further submitted that in view of the fact that the Claimant had not made any Part 36 offer in relation to the Counterclaim, the court was only at present concerned with the issue of liability on the Counterclaim. It was submitted that if the Defendant recovered any damages, then it would be entitled to its costs of the Counterclaim at least until the time when the Claimant made a Part 36 offer which the Defendant failed to beat. That may not be strictly accurate as the Claimant may be able to set off its claim to fees against the damages which are counterclaimed. However, if the Defendant recovered damages in excess of the amount of any fees which it has to pay, and there was no better Part 36 offer from the Claimant, then the Claimant may well be ordered to pay to the Defendants its reasonable and proportionate costs of the Counterclaim.
33. It has been stressed many times that it is not appropriate on an application for security for costs for the court to attempt a detailed examination of each side's prospects of success: see Porzelack KG v Porzelack UK Ltd [1987] 1 WLR 420 at 423. The court may be able to take account of prospects of success if it can clearly be demonstrated that one side or the other has a very high degree of probability of success.
34. In the present case, I do not consider that either side has clearly shown that it has a very high degree of probability of success. I am certainly not persuaded that the Defendant has such a case, notwithstanding its submissions. The Defence which has been pleaded in relation to its Counterclaim appears to me to raise a large number of points both as to liability and quantum which may cause very serious difficulties for the Defendant in the pursuit of its claim. Conversely, in the absence of a much more detailed examination of the facts, it is not right to conclude that the Claimant has clearly demonstrated a very high degree of probability of success on liability. If liability were to be established, then the Counterclaim could lead to an award of damages to the Defendant of some amount, provided that the damages exceed whatever is found to be due by way of fees. It is not appropriate for me to form any view on the material before me as to the Defendant's prospects of recovering the very much higher sums which are counterclaimed as damages.
35. The District Judge also rejected the Defendant's submission that the Claimant's application for security for costs should fail because of alleged delay. I consider the District Judge was right on this point.

The second main issue

36. The remaining issue which was considered by the District Judge, to which I now turn, raises the questions whether an order for security would stifle the Counterclaim and, if so, whether the court should decline on that ground to order security.
37. The courts have always had regard to the question whether the party from whom security is sought will be able to comply with an order that he provide security and that until such security is provided that his claim be stayed. In some cases, the court has decided that it would not be just to order security and an attendant stay if such an order would stifle the claim of the party ordered to give security: see, by way of example, Aquila Design (GRP) Products v Cornhill Insurance plc [1988] BCLC 134 and Trident International Freight v Manchester Ship Canal [1990] BCLC 263.
38. However, the courts have always been realistic as to whether an order for security accompanied by a stay of the underlying claim really would result in the claim being stifled. The correct approach was identified by Peter Gibson LJ in Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 534 at 540 g-h, where he said:

"Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled. There may be cases where this can properly be inferred without direct evidence (see Trident International Freight Services Ltd v Manchester Ship Canal Co [1990] BCLC 263). In the Trident case there was evidence to show that the company was no longer trading, and that it had previously received support from another company which was a creditor of the plaintiff company and therefore had an interest in the plaintiff's claim continuing; but the judge in that case did not think, on the evidence, that the company could be relied upon to provide further assistance to the plaintiff, and that was a finding which, this court held, could not be challenged on appeal.

However, the court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons. As this is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation (see Flender Werft AG v Aegean Maritime Ltd [1990] 2 Lloyd's Rep 27). In that case Saville J applied by way of analogy the approach adopted in another context, that of payment into court as a condition of leave to defend. In M V Yorke Motors (a firm) v Edwards [1982] 1 WLR 444 at 449, 450 Lord Diplock approved the remarks of Brandon LJ in the Court of Appeal:

'The fact that the man has no capital of his own does not mean that he cannot raise any capital; he may have friends, he may have business associates, he may have relatives, all of whom can help him in his hour of need.' "

39. This approach has been repeatedly followed: see, for example, Kufaan Publishing Ltd v Al-Warrak Publishing Ltd, Court of Appeal, 1^st March 2000, unreported.
40. In the present case, the Defendant has always said that it could not comply with the order for security which has been made in this case and it will not be able to raise the sum required from family members or friends or indeed from anyone else. Before the District Judge, Mr Weston relied on the approach adopted by the Court of Appeal in Spy Academy Ltd v Sakar International Inc [2009] EWCA Civ 985 where the court recognised the difficulty of proving a negative, namely, that a party would not be able to find or somehow raise the necessary funds to comply with the order.
41. The District Judge referred to some of the evidence before her as to the financial position of the Defendant, of Mr Christopher Weston, its sole director and shareholder, and of his brother, Andrew Weston. She then said:

"That in my view is not sufficient (again in the circumstances of this case) evidence to support that there are no funds and/or outside assistance that can be obtained."

42. Accordingly, the District Judge held that she was not satisfied that an order for security would stifle the Counterclaim. She then proceeded to consider whether an order for security was otherwise oppressive and whether it would be just to make such an order. She concluded that it would be just to order security.
43. On this appeal, the Defendant has challenged the District Judge's finding that the evidence before her was not sufficient to show the absence of funding for the Defendant which would enable the Defendant to comply with an order for security for costs. The Defendant also applied to adduce further evidence on this point in addition to that which was before the District Judge.
44. I have considered afresh the evidence which was before the District Judge, in particular two witness statements from Christopher Weston, and their exhibits. In his witness statement of 21^st November 2011, he referred to "the dire financial position" of the Defendant. He said that the Defendant was without legal representation because it could not pay for legal assistance. He then referred to his own position. He stated that he was unable to fund the Defendant's litigation. He received "the absolute minimum" by way of director's salary and his living expenses were "extremely limited". He said that he no longer had any personal savings as he had used them all up. He had borrowed to fund the Defendant but he was now in significant debt and was no longer able to borrow any further money. He had no assets against which any loan could be secured. As to a property at Beauvale Road, he estimated that it was worth £155,000 and was charged to Lloyds Bank to secure a debt of £240,000. Another property had been sold reducing the Lloyds Bank debt to £240,000 (later corrected to £220,000). He had enquired of friends and family as to whether they were in a position to offer financial assistance but they were not. He exhibited the Defendant's accounts for several years and other information about the debt to Lloyds Bank and about the property which had been sold.
45. The Claimant served a witness statement of a solicitor, Ms Fitzgerald, in response to Christopher Weston's witness statement of 21^st November 2011. Ms Fitzgerald submitted that the Defendant had not disclosed certain matters which it ought to have done in support of its case that it could not fund a substantial sum by way of security of costs. She referred to the evidence about director's wages, to the debt to Lloyds Bank and to the property at Beauvale Road and the property which had been sold. It was also suggested that there was no evidence as to Andrew Weston's ability to fund the litigation. It was suggested that there was no evidence of requests being made to family and friends.
46. Christopher Weston then served a witness statement of 5^th December 2011. For the amount of the director's salary, he referred to the Defendant's accounts which do indeed support what he had said. He also showed that his personal bank account had been closed by the Bank. He confirmed that Andrew Weston was within the earlier reference to family and friends who had been approached but who could not assist. It was stated that Andrew Weston was also in a dire financial position.
47. Relying only on the evidence before the District Judge, I consider that the Defendant had done enough to prove the negative, namely, that it did not have any funds of its own and it would not be able to obtain funding, from family members or friends or from anyone else, which would enable it to comply with the order for security for costs which was made in this case. The Defendant's accounts showed that it was trading at a substantial loss and that its liabilities substantially exceeded its assets. In my judgment, Christopher Weston's witness statements of 21^st November 2011 and 5^th December 2011 were sufficient to establish that the Defendant would not be able to obtain the necessary funding from family members (including Andrew Weston) or friends or anyone else.
48. On the hearing of the appeal, I was also asked to consider further evidence, which was not before the District Judge, as to the possibility of funding the litigation. I was first shown a witness statement of Christopher Weston of 5^th February 2013. In so far as that statement refers to matters which took place after the hearing before the District Judge, I would be prepared to take account of this further evidence. The further evidence shows more up to date financial information about the Defendant. Its trading and asset position is now worse than before. The Defendant's bank account was closed on 4^th September 2012. There is also information as to Christopher Weston's personal indebtedness. I was also asked to admit a witness statement from Andrew Weston of 12^th February 2013. This witness statement could have been prepared and placed before the District Judge. I will not give permission to the Defendant to rely on this witness statement but, in any event, I do not think that the Defendant's case will turn upon whether I take this further witness statement into account. I consider that Andrew Weston's inability to fund the Defendant to enable it to comply with an order for security for costs in any substantial sum was adequately explained by Christopher Weston in his witness statements which were before the District Judge.
49. The Claimant pointed to the fact that while the amount of the debt charged on Beauvale Road was disclosed by the evidence, the Defendant had not produced a reliable valuation as to that property. All the court had was Christopher Weston's estimate of value and a free internet valuation which was not reliable. I place no weight on the internet valuation but Christopher Weston's estimate of value is admissible and has not been contradicted by any evidence produced by the Claimant. Taking the evidence as a whole, I consider that it is clearly established that the Defendant, Christopher Weston and Andrew Weston lack any worthwhile assets or access to funds.
50. It follows that I am not able to agree with the finding of the District Judge on the question of the Counterclaim being stifled. At the hearing of the appeal, the Claimant submitted that if the Defendant could not comply with the District Judge's order for security then it ought to be able to provide security for costs in an alternative way by obtaining an after the event insurance policy to cover the costs it might be ordered to pay the Claimant in relation to the Counterclaim. That suggestion had not been made at any earlier time. It had not been put to the Defendant for its consideration and it was not raised before the District Judge. There is no Respondent's Notice inviting the court on appeal to vary the District Judge's order in this respect. In any case, I doubt if this suggestion avoids the difficulty caused by the Defendant's inability to comply with the order for security which has been made. I was not given any information as to the size of the premium which the Defendant would have to pay for ATE insurance, if it could obtain it at all. The Defendant's inability to comply with an order that it give security in any substantial amount means that it would not be able to pay a premium of any substantial amount.
51. The District Judge's decision that it was just to order security in this case was made, I find, on an incorrect basis as to the stifling point. It follows that I must reach my own conclusion on whether it is just to order security in this case and I will make that decision against the background that an order for security in any substantial amount will have the effect of stifling the Counterclaim.
52. When reaching my decision, I am bound to take into account any up to date evidence as to the financial position of the Defendant and of Christopher and Andrew Weston. The up to date evidence which has been served confirms that the position remains one where an order for security of any substantial amount will have the effect of stifling the Counterclaim.
53. In these circumstances, I need to consider the effect of a finding that an order for security for costs of any substantial amount would stifle the Counterclaim. Does such a finding necessarily preclude making an order for security for costs? If not, what weight should be given to that finding in deciding what is just? It seems to me that I derive considerable assistance from the authorities in answering both of these questions. It is helpful to look at the relevant decisions before the Human Rights Act 1998 and then to consider the effect of that Act.
54. The earlier cases to which I was referred (in particular Hutchison and Keary) made it clear that the fact that there was a risk that an order for security for costs would stifle the claim did not necessarily prevent the court from making such an order. This was said in terms in Hutchison [1993] BCLC 307 at 313 d-e. The matter was described by Peter Gibson LJ in Keary [1995] 3 All ER 534 at 540 a-c as follows:

"The court must carry out a balancing exercise. On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security. Against that, it must weigh the injustice to the defendant if no security is ordered and at the trial the plaintiff's claim fails and the defendant finds himself unable to recover from the plaintiff the costs which have been incurred by him in his defence of the claim. The court will properly be concerned not to allow the power to order security to be used as an instrument of oppression, such as by stifling a genuine claim by an indigent company against a more prosperous company, particularly when the failure to meet that claim might in itself have been a material cause of the plaintiff's impecuniosity (see Farrer v Lacy, Hartland & Co (1885) 28 Ch D 482 at 485 per Bowen LJ). But it will also be concerned not to be so reluctant to order security that it becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on the more prosperous company (see Pearson v Naydler [1977] 1 WLR 899 at 906)."

55. The Defendant relied on the Human Rights Act 1998 in that he submitted that an order for security for costs with which the Defendant could not comply would infringe its rights under Article 6 of the European Convention for the Protection of Human Rights and Fundamental Freedoms, in particular, its right of access to the court for the determination of its rights as claimed in the Counterclaim. At the end of the oral hearing of the appeal, I asked both parties to make detailed written submissions on the possible application of Article 6 to the facts of this case and they did so.
56. The possible application of Article 6, when a court is asked to make an order for security for costs, was considered by the Strasbourg Court in Tolstoy Miloslavsky v United Kingdom (1995) 20 EHRR 442, where the Court said (at paragraph 59) that Article 6 did confer a right of access to a court for the determination of a person's civil rights and obligations. The right of access to a court may be subject to limitations in the form of regulation by the State. The State enjoyed a certain margin of appreciation. However, the Court must be satisfied, firstly, that the limitations applied did not restrict or reduce the access left to the individual in such a way or to such an extent that the very essence of the right is impaired. Secondly, a restriction must pursue a legitimate aim and there must be a reasonable relationship of proportionality between the means employed and the aim sought to be achieved.
57. In Tolstoy Miloslavsky it was held that the order made, in the circumstances of that case, for security for costs in relation to an appeal to the Court of Appeal did not infringe Article 6. It was held that the order pursued a legitimate aim, namely, protecting the other party from being faced with an irrecoverable bill for costs if he were successful in resisting the appeal. The Strasbourg Court took into account the fact that the order was made in relation to an appeal, rather than to a trial at first instance (a 40 day trial had already taken place in that case). Further, when the Court of Appeal ordered security for costs, it had considered the merits of the appeal and had held that the appellant had failed to show real and substantial grounds for his appeal. However, it should be noted that this case did not consider what approach should be adopted to an application for security for costs which would prevent a party having a trial of his claim before a court of first instance.
58. The application of Article 6 to an order for "security for costs" was considered again by the Strasbourg Court in Ait-Mouhoub v France (1998) 30 EHRR 382 where the court said:

"52. As to the merits, it reiterates that the "right to a court," of which the right of access constitutes one aspect (see the Golder v United Kingdom judgment of 21 February 1975, Series A no. 18, p. 18, para. 36) is not absolute but may be subject to limitations permitted by implication. However, these limitations must not restrict or reduce a person's access in such a way or to such an extent that the very essence of the right is impaired, and they will not be compatible with Article 6(1) if they do not pursue a legitimate aim or if there is not a reasonable relationship of proportionality between the means employed and the aim sought to be achieved (see, among many other authorities, the Bellet v France judgment of 4 December 1995, Series A no. 333-B, p. 41, para. 31, and the Levages Prestations Services v France judgment of 23 October 1996, Reports of Judgments and Decisions 1996-V, p. 1543, para. 40). Furthermore, the Convention is intended to guarantee not rights that are theoretical or illusory but rights that are practical and effective. This is particularly so of the right of access to the courts in view of the prominent place held in a democratic society by the right to a fair trial (see the Airey v Ireland judgment of 9 October 1979, Series A no. 32, pp. 12-13, para. 24)."

59. In Ait-Mouhoub, it was held that an order for "security for costs" in a substantial amount did infringe the litigant's rights under Article 6 when he was unable to comply with the order. However, it should be noted that the requirement of "security for costs" in that case was not the same as the type of order being sought in the present case, in that the requirement was not for the purpose of securing payment of any order for costs made in favour of the other party to the litigation. The question as to what is a legitimate purpose and what is proportionate to the pursuit of that purpose may be different in such a case as compared with the circumstances considered in Ait-Mouhoub.
60. The right conferred by Article 6 has been influential in a number of cases where the court has been asked to make orders for security for costs, or similar orders. This can be seen from the discussion in Ford v Labrador [2003] 1 WLR 2082, a decision of the Privy Council, at [17] – [21]. At around the same time, in Olatawura v Abiloye [2003] 1 WLR 275 at [22], Simon Brown LJ stated that whether the party concerned can raise the money to comply with an order for security for costs was a prime consideration, in view of the terms of Article 6. In Ali v Hudson [2003] EWCA Civ 1793, after citing Simon Brown LJ in Olatawura, Clarke LJ went further, saying:

"[40] Those principles show that the power to order security for costs in a case of this kind should be exercised with great caution. The correct general approach may be summarised as follows:

   i) it would only be in an exceptional case (if ever) that a court would order security for costs if the order would stifle a claim or an appeal;

   ii) in any event,

   a) an order should not ordinarily be made unless the party concerned can be shown to be regularly flouting proper court procedures or otherwise to be demonstrating a want of good faith; good faith being understood to consist (as Simon Brown LJ put it) of a will to litigate a genuine claim or defence (or appeal) as economically and expeditiously as reasonably possible in accordance with the overriding objective; and

   b) an order will not be appropriate in every case where a party has a weak case. The weakness of a party's case will ordinarily be relevant only where he has no real prospect of succeeding."

61. The most recent judicial statement cited to me on the relevance of Article 6 in this context was in the judgment of the Court of Appeal in Al-Koronky v Time-Life Entertainment Group Ltd [2006] EWCA Civ 1123 where it was said:

"[30] We agree with the submission of [Counsel] that art 6 of the European Convention on Human Rights has a bearing on this issue, by virtue of s 3(1) of the Human Rights Act 1998 which requires both primary and subordinate legislation to be read and given effect, so far as possible, compatibly with the Convention rights. In Tolstoy Miloslavsky v United Kingdom (1995) 20 EHRR 442, para 59, the European Court of Human Rights held, what it has since reiterated, that while the state has power to regulate access to its courts, it must not do so in ways which "restrict or reduce the access left to the individual in such a way or to such an extent that the very essence of the right is impaired". The court also insisted on "a reasonable relationship of proportionality between the means employed and the aim sought to be achieved". The domestic obligation to read CPR 25.13 conformably with the law of the Convention is met, we believe, by the approach taken in this judgment and, in particular, by the principle that the court may not fix security in what it knows to be an unaffordable amount.

[31] It is in the context of what we have said so far that, in our respectful view, the judgment of Peter Gibson LJ in Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 534, 539-40, and that of Potter LJ in Kufaan Publishing Ltd v Al-Warrak Publishing Ltd (1 March 2002, unreported), should be read. There is a clear difference between incurring a substantial risk, in the overall interests of justice, that a Claimant will not be able to raise the sum required as security, and setting a sum in the knowledge that he cannot do so. The latter is tantamount to striking out his claim and requires the same process and justification as any other strike-out. The former is the striking, within the Convention paradigm, of a balance of the kind described in the two judgments we have mentioned.

[32] It is this rather than the fact that those two cases were concerned with companies that, in our view, marks them out. The fact, relied on by [Counsel], that companies are subject to a distinct security regime based on their legal personality, while individuals are protected by law against being made to put up security for costs merely because they live abroad, relates not to the setting of an appropriate sum but to the availability in principle of an order for security. It follows that Eady J did not err in law in para 28 when he declined, in relation to the setting of an amount, to distinguish Keary's case. Nor did he err in relation to art 6 of the Convention when he spoke in the same paragraph of "the parties' respective rights" under it. [Counsel] submits that the only relevant right here is the Claimants' right of access to the courts. But it is manifest that Defendants too have entitlements under art 6, including a right not to have their access to a court rendered prohibitive by the prospect of irrecoverable costs or, as demonstrated by the judgment in Tolstoy, an entitlement to have Claimants' access limited by relevant and proportionate conditions."

62. It was also said in Al-Koronky at [26] that to require an unaffordable amount of security as a way of disciplining a wayward litigant was to transform security for costs into a means of striking out a claim without any of the ordinary safeguards.
63. In the present case, I consider that I should apply the statements of principle in Al-Koronky. I am satisfied that the order for security made by the District Judge and any order for security for a substantial sum would stifle the Counterclaim. In those circumstances, I consider that I ought not to make an order which would have that effect. Even if I were able to make such an order in "an exceptional case" (see Ali v Hudson), I am not able to conclude that this is such a case. Even if I take into account the merits of the Counterclaim, I am not able to conclude that the Counterclaim is so weak that it would be just for it to be stifled by an order for security for costs.
64. Having reached that conclusion, it is not necessary to consider a separate submission made by the Defendant that its impecuniosity was caused by the Claimant's negligence so that, on that ground, it would be unjust to make an order for security for the Claimant's costs of the Counterclaim. That submission is very much tied up with the merits of the Counterclaim. On the present material, I am not able to say one way or the other whether the Defendant will be able to make good this submission.

The result

65. It follows that I will allow the appeal and set aside the order for security which was made by the District Judge.
66. Although I will allow the appeal, I wish to comment on the way in which the Defendant has conducted the litigation to date and the effect of such conduct on the Claimant. I have described how the Defendant has conducted itself and the fact that the court has made a number of orders for costs against it. It is clear that the Defendant will not pay the costs which it has been ordered to pay. I am concerned that my decision should not be regarded by the Defendant as a licence to behave unreasonably in the course of this litigation perhaps encouraged by the belief that any orders for costs which are made against it in the future can simply be ignored. I think that the court should closely case-manage this case so as to reduce the risk of that happening and to ensure that the case is dealt with as economically as possible.