England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY
COURTS OF ENGLAND AND
WALES BUSINESS LIST (ChD

		Rolls Building
		24 May 2018

MR. JUSTICE MARCUS SMITH:

Introduction

1. This is an application by various defendants to these proceedings, DS7 Limited and others (the "Defendants"), against the claimant company (the "Claimant") for security for costs. The amount of security sought is in the sum of £500,000. The basis for the application that there is reason to believe that the Claimant would be unable to pay the Defendants' costs, should an adverse costs order be made against it.
2. For security for costs to be awarded, I must be satisfied that a two-stage test is met under CPR 25.13 (1) and (2)(c):

(1) First, there must be reason to believe that the Claimant would be unable to pay the Defendants' costs. This is the "entry requirement" for an application and it is conceded by the Claimant that this, first, requirement is met.

(2) The second requirement is whether it is, in all the circumstances, just that an order for security for costs is made.

Given the concession that has been made in relation to the first requirement, it is the second requirement that has occupied the substance of the submissions before me today and will occupy most of this ruling.

Framework for the second requirement

3. The criteria which I should use as a broad framework to structure the exercise of my discretion in respect of the second requirement is helpfully set out in Sir Lindsay Parkinson & Co v. Triplan [1973] QB 609. The statement of the law there set out has obviously been expanded upon and articulated further in a number of subsequent cases, but Triplan provides a helpful starting point for the manner in which I should approach the exercise of my discretion. I shall approach the question of whether it is just to make an order for security in all the circumstances using the Triplan guidance and the following heads:

(1) Whether the claim is bona fide and not a sham. I include under this head the question of whether I should determine the strength of the claim advanced by the Claimant. The Claimant asserts that the claim has a very high chance of success. By contrast, the Defendants accept that the claim is a bona fide one and not a sham, but they go no further than this. They contend that the claim can, and will, successfully be resisted by the Defendants.

(2) Whether the application for security for costs is being used oppressively to stifle a serious or genuine claim. The burden here is on the Claimant. I will, under this head, consider the precise circumstances of the Claimant's insolvency; the fact that the Claimant is in liquidation; and the manner in which the liquidator is proceeding to bring this claim on behalf of the Claimant.

(3) Whether the Claimant's want of means has been brought about by the conduct of the Defendants. It was accepted by the parties that the weight I could attach to this factor was related to the first factor considered in paragraph 3(1) above.

(4) Whether the application for security for costs has been brought too late.

(5) Miscellaneous. Finally, under a fifth head, I have a miscellaneous point, on which the Claimant relies, arising out of the the manner in which the Defendants are funding their defence and their conduct during the course of this litigation more generally. These points have been raised in the evidence relied upon by the Claimant and have been addressed briefly in response by the Defendants.

The first factor: bona fide and not a sham

4. I turn then to the first of the various factors I have described. As I have already noted, it is accepted by the Defendants that the Claimant's claim is bona fide: but it is asserted that the claim is disputed on good grounds. In short, the Defendants say that the claim against them is arguable, but that I should go no further than this in assessing the merits.
5. By contrast, the Claimant contends that its claim has a very high chance of success, and that this is a factor that I should take into account.
6. If a court could reliably establish the outcome of the proceedings before it at the stage when a security for costs application is made, that would clearly be highly relevant. The court could say that because the claimant was very likely to succeed, the risk of an adverse costs order was therefore low, and security should not be ordered notwithstanding the claimant's inability to pay costs, were an adverse costs order to be made. Conversely, if it were very clear that a claim, although technically arguable, was going to fail, that likelihood would be relevant to the assessment.
7. But that is precisely the problem. On an interlocutory application such as this, a court must be wary about being drawn into an analysis of the merits. The court does not have before it all of the relevant material that the trial judge will have. To go beyond assessing the arguability of a claim involves the court in a process that – in most cases – it is simply not equipped to carry out, because of the early stage at which the application is made in the proceedings.
8. For this reason, the notes in Civil Procedure 2018 make clear that it is important for the court to try to avoid a situation in which the merits have to be considered. The parties should not attempt to go into the merits of the case unless it can be clearly demonstrated one way or the other that there is a high degree of probability of success or failure.
9. Not only must it be possible for the merits to be established with a high degree of probability: that conclusion must be capable of being reached on the evidence before the court at the interlocutory stage extremely quickly in temporal terms. It seems to me that when the court is being asked to consider the merits, it is not enough for a point to be demonstrated to be a good or strong one after considerable and detailed analysis of the evidence before it. Given that this is an interlocutory application, the merits need to be assessed proportionately to the nature of the hearing.
10. In this case, I have – and I appreciate that this is not the only application that I have been dealing with – around eight or nine lever arch files of documents. I have been addressed by both counsel on the merits of the case for just under two hours. It seems to me that in such circumstances, it is not right for the court to be drawn into an adjudication of the merits. I readily confess that Mr. Sims, Q.C., on behalf of the Claimant, made a number of powerful points. I discouraged Mr. Mohyuddin, Q.C., for the Defendants, from responding to these points because I could see one of only two outcomes occurring. I would either, as I am choosing to do, not determine the point; or I would have to make a judgment that would engage so closely with the merits of the case as to be an affront to the way in which one should conduct interlocutory processes.
11. So for the purposes of the first factor, I am prepared to accept, as indeed is conceded by the Defendants, that the Claimant's claim is a bona fide one, genuinely brought, and clearly not a sham. I leave open the question of whether there is a very high chance of success as a matter that I am unable to determine given the nature of the present application.

The third factor: Claimant's want of means brought about by the Defendants' conduct

12. Taking matters out of order, I shall now deal with the third factor, because it is closely related to the first.
13. Whether the Claimant's want of means has been brought about by the conduct of the Defendants is a factor that will generally be linked to the first point that I have just considered. Certainly, on the facts of this case that is so: in this case it is clearly asserted by the Claimant that monies were paid away from the Claimant by the Defendants in breach of duty.
14. Were that case to be made out then it would, I consider, follow that the Claimant's want of means had been brought about by the Defendants' conduct. There was, in this case, the interesting gloss, according to Mr. Sims, Q.C., that win or lose the Claimant would recover significant assets at the conclusion of the proceedings.
15. Again, there may well be something in this contention, but the same reasoning that I applied in relation to the first factor applies to this third factor. In a straightforward case, where the merits can easily be discerned and stated, it is likely also that the reason for the claimant's want of means will similarly be clear. But in a case as complex as this one, I do not consider that I can appropriately conclude that the fact that the Claimant is now in liquidation is down to the Defendants' breach of duty as alleged by the Claimant. If, of course, the various payments at issue in this case were made legitimately, then I do not consider that it could properly be said that the Claimant's want of means was brought about by the Defendants' conduct.
16. I do not, therefore, attach weight to this third factor.
17. I approach this application on the basis that the claim is properly brought, but that it is also being properly defended. On this basis, the risk of an adverse costs order against the Claimant is a real one, and it cannot with sufficient certainty be said that the Claimant's likely inability to pay is a matter that can be laid at the Defendants' door. Prima facie, therefore, given the Claimant's want of means, and before consideration of the remaining factors, an order for security for costs would in this case be appropriate.

The fifth factor: miscellaneous

18. Moving to the last of the various factors that I have identified, I do not consider that questions relating to the funding of the Defendants, nor how they have conducted themselves in other aspects of these proceedings, to be a matter of any assistance in this application.
19. The manner in which the Defendants have conducted themselves in the past is not a matter to which I can properly pay regard, given the highly factual nature of the allegations advanced by the Claimant, even if I otherwise considered them material (which is frankly doubtful).
20. The manner in which the Defendants are funding themselves might very well be relevant if the boot were on the other foot and an application for security of costs were being made by the Claimant against the Defendants. But that is not the case here and I fail to see the relevance of the Defendants' funding in the context of this application.
21. It therefore seems to me that the critical factor in determining whether security for costs should be ordered is the balance between the conclusion that I have reached in paragraph 17 above and the second of the factors identified in paragraph 3 above, namely whether the application for security is stifling a serious or genuine claim.

The second factor: oppressively stifling a serious or genuine claim

22. I was referred to a number of authorities on the question of stifling. It is appropriate to refer to a few of them. I begin with a decision of the Court of Appeal in Aquila Design GRB Products Ltd v. Cornhill Insurance plc [1988] BCLC 134 at 137 (per Fox LJ):

"It is necessary for the court, in looking at the whole matter, to take into account the burden on the plaintiff of having to provide security, with the result that it may have to abandon the action altogether in consequence of impecuniosity and an inability to provide the amount ordered by the court. In such cases there is therefore a danger of oppression as a consequence of making an order for security. That is one of the matters which is recognised in particular in the judgment of Megarry V-C, to which I have referred. Of course, creditors can put up money themselves, but the jurisdiction is not against creditors; it is against the company."

That, I consider, is a particularly important and salutary point for me to bear in mind. The question is: can the company raise the money or can the company not raise the money with the result that the claim will be stifled?

23. In Keary Developments Ltd v Tarmac Constructions Ltd [1995] 3 All ER 534, in the course of a detailed judgment, Peter Gibson LJ set out various propositions which are relevant to the question of security for costs. He began by emphasising the importance of the case that I mentioned at the outset, Triplan. I will not read out all of the propositions articulated by Peter Gibson LJ, but only those with specific relevant to the question of stifling. Beginning at 539, Gibson LJ stated:

"(2) The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security…By making the exercise of discretion under s.726(1) conditional on it being shown that the company is one likely to be unable to pay costs awarded against it, Parliament must have envisaged that the order might be made in respect of a plaintiff company that would find difficulty in providing security…

(3) 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 of 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 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…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…"

That, I think, is all I need cite from Peter Gibson LJ's judgment, but I stress I have borne in mind all of the principles that he has articulated in that judgment.

24. Finally, and really by way of completeness, I refer to the decision of the Supreme Court in Goldtrail Travel Ltd v. Onur Air Tasimacilik AS [2017] UKSC 57. There are two paragraphs to which I draw particular attention. At [18], the same point as I made earlier by reference to the decision in Aquila is made, namely that it is the company that is the relevant person who is to raise the money:

"When, in response to the claim of a corporate appellant that a condition would stifle its appeal, the respondent suggests that the appellant can raise money from its controlling shareholder, the court needs to be cautious. The shareholder's distinct legal personality…must remain in the forefront of its analysis. The question should never be: can the shareholder raise the money? The question should always be: can the company raise the money?"

At [23], various principles applicable to the question of security are set out. I do not set them out, but only draw attention to this quotation:

"Has the appellant company established on the balance of probabilities that no such funds would be made available to it, whether by its owner or by some other closely associated person, as would enable it to satisfy the requested condition?"

25. That is all I propose to say about the law. It is necessary to turn to the facts.
26. The relevant facts are set out in the fifth witness statement of Mr. Davis, a solicitor acting on behalf of the Claimant. What Mr. Davis' statement does, amongst other things, is set out in some detail the approach of the liquidator when in pursuing this claim on behalf of the Claimant pursuant to the liquidation. Paragraph 51 sets out the financial position of the Claimant and the manner in which the liquidator is proceeding with this claim:

"The Liquidator has provided me with an abstract from her 'Receipts and Payments Account' in relation to the liquidation of [the Claimant] for the period from 21 July 2016 to 11 May 2018. It shows receipts of nil, and payments of £1,324.00, illustrating that ALD has no cash from which to pay professionals. In these circumstances I can confirm that:

(a) The liquidator is acting in these proceedings on a contingent basis.

(b) Mishcon [the Claimant's solicitors] is acting in these proceedings on a fully deferred and contingent basis, with its fees only being paid upon realisation.

(c) Counsel (Hugh Sims, Q.C. and Simon Passfield) are acting in these proceedings on a fully deferred and contingent basis, with their fees only being paid upon realisation.

(d) Honeycomb, the forensic accountants in this matter, is acting in these proceedings on a fully deferred and contingent basis, with its fees only being paid upon realisation."

27. Paragraphs 52 and 53 of the statement then set out the limited derogations from this approach of causing professional fees to be incurred on only a fully deferred and contingent basis. There are some costs which cannot be, or which the liquidator has been unable to negotiate to be, paid on this basis. A number of expenses, including expenses of Swiss lawyers and others, have had to be made as disbursements out of the liquidator's office. These amount to just under £65,000. The details are set out in paragraphs 52 to 54 of Mr Davis' statement.
28. Paragraph 55 says this:

"I am instructed that Wilkins Kennedy [that is the liquidator's firm] would not be prepared to pay security for the [Defendants'] costs in the sum of £500,000 or at all."

29. Mr. Davis then considers, in paragraphs 83ff of his statement, the question of the Claimant's ability to fund any security it might be ordered to pay. Essentially the point made by Mr. Davis is that the claim would be stifled. Mr. Davis says is that the Claimant has insufficient means itself and that is it is unable to obtain assistance from a third party who might reasonably be expected to provide assistance.
30. In paragraph 85, Mr. Davis sets out a list of the parties who might, but who in the event, he says, cannot, assist the Claimant in funding any order for security. It is appropriate that I read extensively from paragraph 85:

"Further, having taken steps to investigate the issue, [the Claimant] cannot obtain assistance from a third party who might reasonably be expected to provide assistance if they could:

(a) In accordance with standard practice, the Liquidator would not be prepared to provide funds to stand as security for costs, and nor would her firm, Wilkins Kennedy LLP;

(b) The Liquidator has rejected the possibility of approaching the creditors to provide funds to stand as security for costs (either with cash or guarantee / bank guarantee for the following reasons:

(i) The largest creditor, by proof of debt lodged (albeit that no supporting documentation to verify the amount claimed has been provided) is £24,255,721.77 by DS7. For the obvious reason that DS7 is the primary Defendant in this claim, the Liquidator is not able to approach the entity that purports to be the largest creditor in this liquidation for security for costs."

Pausing there, this point is entirely accepted by the Defendant, who make no criticism of the failure to approach DS7. Going on with paragraph 85:

"(ii) The majority of the remaining creditors are the unit buyers. The number of claims that the Liquidator has received to date is 514.^[1] The Liquidator has considered approaching those unit buyers, but rejected the idea because they are not, to her knowledge, wealthy people; and are very unlikely to be in a position to provide funds to stand as security in circumstances where they have lost considerable sums on account of the unlawful conduct of the Defendants."

31. That is all I am going to read from paragraph 85. I should say that paragraph 85(c) describes the steps that the liquidator has taken with a view to obtaining a quotation for after the event insurance. For reasons that I am not going to go into – but I stress I make no criticism of either party – it has not been possible to obtain a quote.
32. I do not consider that I am hampered in reaching a decision in this regard. It seems to me that the question that I must address is one of principle, namely whether the claim would be stifled by reason of the Claimants' lack of assets. If I conclude that it would be, it really makes no odds one way or the other whether the security is ordered by way of a payment into court or by way of a premium for after the event insurance. That, it seems to me, is a detail that can be ironed out later were I to make an order for security. The real question is one of stiflement.
33. The position is as follows:

(1) The Claimant is an insolvent company in liquidation. The presumption, in the ordinary course, is that it would not be able to pay any costs if those were ordered at the conclusion of these proceedings.

(2) On the evidence that I have seen, it is possible to go further than the mere presumption. I find, on the evidence before me, that there is no prospect of the Claimant being able to pay of itself any sum by way of security.

(3) The question, therefore, arises, what would happen if I were to make, notwithstanding these findings, an order that security for costs be paid? Were I to make such an order, the only possible outcomes are the following three:

(a) The claim would not proceed any further.

(b) The liquidator would, contrary to all normal practice, herself cause to have paid from her firm the amount of security ordered.

(c) The liquidator would seek to persuade the 514 creditors to whom I have referred each to put up some money to enable the security to be provided.

(4) The first potential outcome obviously results in the claim being stifled. It is the second and third potential outcomes that I must consider further. In each case, I must ask myself two questions. First, are these instances where the company – the Claimant – is raising the money to fund the security for costs (see paragraphs 22 and 24 above)? Secondly, even if these were instances where the Claimant was raising the funds, are these instances anything more than theoretical?

(5) I begin with the second potential outcome: the liquidator causing the security to be paid out of her firm's coffers:

(a) It is plain that this is not a case of the Claimant, the company, raising funds. Self-evidently, these funds are coming from a third party, the liquidator.

(b) Moreover, I am satisfied that the liquidator would not make such a payment. It would be an entirely unusual course for a liquidator to take such a course, and nothing in the evidence persuades me that it would occur in this case. I regard the prospect as theoretical or fanciful.

(c) Yet still further, I see real difficulties in taking the liquidator's propensity to pay into account when considering the question of security. It is well-established that a liquidator will not be obliged to pay costs by way of a third party costs order made pursuant to section 51 of the Senior Courts Act 1981 unless there is a degree of impropriety or misconduct in the bringing of the proceedings. The mere fact that the liquidator has caused proceedings to be brought, but has lost, does not result in general in a third party costs order. Were I to make an order that the Claimant provide security in circumstances where I appreciated that that security would, in reality, be provided by the liquidator, I take the view that what I would be doing is in effect creating a regime where, in advance of an adverse costs order, the liquidator was being obliged to provide the security. That, as it seems to me, is entirely contrary to the public interest in the insolvency regime that exists in this jurisdiction. It is critical in the public interest that liquidators proceed in a manner that is uninhibited in terms of deciding how to bring actions, including how those actions are framed and funded.

For these reasons, I conclude that there is no real prospect of the company funding any order for security through the liquidator; and that such funding would not be out of the Claimant's funds in any event.

(6) The third potential outcome involves funding from the creditors. As to this:

(a) It is the liquidator's duty and obligation to determine whether and, if so, how a company in liquidation brings claims against third parties. It is for the liquidator to determine how such claims are to be funded. In some cases, the liquidator may seek to engage in some form of funding arrangement, whereby the claim is paid for by somebody else. In such circumstances, it is quite clear that, as regards such a funder, the section 51 jurisdiction would be engaged.

(b) Such a course has emphatically not been taken in this case. The liquidator has chosen to structure the manner in which this litigation is funded by deferring all costs that can be deferred on a contingent basis. In short: no win, no fee. It is true that to a limited extent some unavoidable costs have been incurred to date. These are costs that the liquidator has chosen to incur as an incidence in bringing these proceedings.

(c) The liquidator has chosen not to approach the creditors. I find the explanation for that in Mr. Davis' statement entirely credible and it seems to me that it is not for this court to look behind the funding decisions of the liquidator regarding the progression of this claim. Such decisions are nuanced and difficult and – in the first instance – for the liquidator alone. Indeed, as I have noted, were the remaining creditors to be persuaded to put in money to fund the claim, they would expose themselves to a risk of a third party funding order themselves in due course, were the Claimant's claim to be lost.

Whilst I accept, therefore, that there is the potential for creditor funding of any security for costs, that potential is one for the liquidator to explore. I cannot say whether – were an order for security for costs to be made – creditor funding would be forthcoming. But it seems to me wrong to second guess the liquidator's approach; and in any event, any creditor funding would not be funding from the company. I do not consider that the fact that a company in liquidation has creditors in the wings to be a relevant factor to take into account unless there is an actual approach involving those creditors actually being encouraged to fund the claim, which they are not in this case.

34. I conclude that there is no source of funding available to the Claimant that would enable it to finance an order for security for costs, were I to make one. Viewing, as I must, the question of whether it is the company that can raise the money, it is clear that it cannot. I therefore conclude that there is a clear risk – indeed, I put it rather higher than that – that were I to make an order for security for costs, this claim would be stifled; and that a bona fide and genuine claim would not be brought.

Conclusion

35. I must, in light of my conclusions in paragraphs 17 and 34 above conduct a balancing exercise as between the interests of the Defendants and those of the Claimant. Because the Claimant is in liquidation, it is really the interests of the creditors of the Claimant that I must have in mind. I conclude that the balance in this case clearly favours the liquidator continuing to bring these claims on behalf of the Claimant for the benefit of the Claimant's creditors, and that the Defendants therefore should not have security for costs.
36. I therefore conclude that the application for security for costs must be dismissed.

The fourth factor: the application has been brought too late

37. In light of this conclusion, it is not necessary for me to deal with the fourth factor, the lateness of this application. However, because I was addressed on it, I say a few words. The conduct of the Defendants in bringing this application when they did is not something that would have caused me to reject the application.
38. Whilst it is plain that applications for security for costs need to be brought early on in the proceedings, the reason that is the case is this: if a claimant proceeds some way down the litigation route before an application for security is made, were security for costs to be applied for and obtained, that might cause the claimant to cease to prosecute the claim, with the result that the costs already incurred would be thrown away. That is the reason why applications for security for costs need to be brought promptly.
39. I do not consider that this is such a case. This is a case which started by way of ex parte applications for freezing injunctions, which moved on to inter partes applications. I do not consider that the Defendants can properly be criticised for the timing of this application.
40. However, for the reasons that I have given, the Defendants' application for security for costs is dismissed.

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Note 1   There was a typographical error to this figure, which I have corrected.    [Back]