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QUEENS BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
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Texuna International Ltd |
Claimant |
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- and - |
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Cairn Energy Plc |
Defendant |
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Mr Giles Wheeler (instructed by CMS Cameron McKenna) for the Defendant
Hearing dates : 23 April, & 7 May, 2004
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Crown Copyright ©
Mr Justice Gross :
INTRODUCTION
"(1) The court may make an order for security for costs … if-
(a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and
(b) (i) one or more of the conditions in paragraph (2) applies…
(2) The conditions are-
(a) the claimant is-
(i) resident out of the jurisdiction; but
(ii) not resident in a Brussels Contracting State, a Lugano Contracting State or a Regulation State, as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982;
….
(c) the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so….."
i) The Claimant was resident within the jurisdiction;
ii) It had not been shown that the Claimant would be unable to pay the Defendant's costs;
iii) As a matter of discretion, relying, inter alia, on Nasser v United Bank of Kuwait [2001] EWCA Civ 556 [2002] 1 WLR 1868 (CA), no such order should be made;
iv) If any order was to be made it should be in a minimal or reduced amount.
" 5. The Defendant ('Cairn') is a Scottish company which is in the business of exploring for hydrocarbon reserves around the world. The Claimant ('Texuna') is a Hong Kong registered company which principally trades as 'importers, exporters and marketing agents'. Cairn and Texuna together bid for oil exploration rights in the part of the Caspian Sea within the territory of Turkmenistan. The bid was unsuccessful and has given rise to Texuna's claims against Cairn in these proceedings.
6. …..Texuna originally claimed only US$550,000 by way of repayment of US$1,000,000 which was drawn down by Cairn under a letter of credit issued on behalf of Texuna. However, Texuna's claim has been expanded by amendments and, since the service of Further Information by Texuna on 22 August 2003, Texuna's claim for damages has been substantially higher, with the amount claimed now exceeding US$121 million."
Without more ado, I turn directly to the principal issues.
(I) RESIDENCE
(II) INABILITY TO PAY
i) While they could not be ignored, not much weight could be given to the unaudited management accounts of 31st March, 2004. Accordingly, the audited accounts of 31st March, 2003 were critical.
ii) Having regard to the balance sheet, by far the most valuable asset was an interest in and joint venture with an associated company ("Crotex"), which in turn owns a Moscow shopping mall or superstore. However, the Claimant's auditors, Peter Y.H. Lam & Co., Certified Public Accountants, Hong Kong ("the auditors") themselves spoke of the "fundamental uncertainty" in respect of the value of that interest by reason of it not having been subject to any or any proper audit. Moreover, there was no explanation for the dramatic upwards revaluation of the Crotex interest in the Claimant's books – a revaluation from some HK$12 million at cost to HK$245 million in the balance sheet.
iii) As to other current assets, prepayments by the Claimants were properly classified as such as assets – but, the moneys having been paid away, would not be realisable to pay a substantial bill for costs.
iv) Having regard to current liabilities, the current bank balances and cash were negative; they revealed a dependence on overdraft or borrowing facilities.
v) What remained were trade and other receivables ("receivables") which, in net terms on the balance sheet, amounted to some HK$30 million; even if reduced further by the amount of the previous year's bad debts, these came to some HK$20 million; but matters did not rest with the balance sheet.
vi) While, given the audited accounts, it had to be assumed that the receivables represented moneys likely to come in, there was no basis for thinking that they would be available to meet a bill for costs. Having regard to the profit and loss statement ("the P&L statement") and the figures for cash flow from operating activities, it was apparent that, but for the interest in Crotex, the Claimant was trading as a loss.
vii) Therefore in summary, the Claimant's ability to pay an order for costs hinged on the receivables but there was no basis for thinking that those would be available to discharge such an order, given that, the Crotex interest apart, the Claimant was trading at a loss. As no reliance could be placed on the management accounts, there was nothing to correct this picture, as presented by the 31st March, 2003 audited accounts.
i) There was no basis for any conclusion that the Claimant would be unable to pay the costs of the proceedings if ordered to do so.
ii) Though there was, he said, no need to do so, he was content to exclude from consideration all amounts attributable to Crotex, prepayments and bank balances.
iii) Robson Rhodes - unlike Mr. Wheeler – had not grappled with the receivables; the points made by Mr. Wheeler in that regard were therefore unsupported by accountancy evidence.
iv) In any event, there was no sound basis for Mr. Wheeler's approach; as at the 31st March, 2003, the receivables constituted an asset properly designated as such in the balance sheet; the figures from the P&L statement and cash flow calculations had already been factored in, serving to reduce the bank balances and cash figure; unless the Defendant was to mount a challenge to the audited accounts (which it had not done), there was no basis for concluding that the receivables did not represent assets which would be available to satisfy an order for the payment of the costs of the proceedings.
v) Further, there was no or no good reason to discount the 2004 management accounts; on that basis the Claimant's profitability had improved; although, as Mr Wheeler had pointed out, the bank balance remained negative, net current assets had (if anything) increased and now showed a surplus of some HK$90 million; in essence, the Claimant was financing itself on the basis of ongoing trading. At all events, nothing in the 2004 management accounts suggested that the conclusions to be drawn from the 2003 audited accounts no longer held good.
vi) In summary, therefore, neither on the basis of the 31st March, 2003 figures nor on the later figures could the Defendant make good its case under sub-rule (c).
(III) DISCRETION
"58. The exercise of the discretion conferred by rule 25.13(1) and (2)(a)(i) and (b)(i) raises … different considerations. That discretion must itself be exercised … in a manner which is not discriminatory. In this context at least, I consider that all personal claimants … before the English courts must be regarded as the relevant class. It would be both discriminatory and unjustifiable if the mere fact of residence outside any Brussels/Lugano member state could justify the exercise of discretion to make orders for security for costs with the purpose or effect of protecting defendants…against risks to which they would equally be subject, and in relation to which they would have no protection, if the claim … were being brought by a resident of a Brussels or Lugano state. Potential difficulties or burdens of enforcement in states not party to the Brussels or Lugano Convention are the rationale for the existence of any discretion. The discretion should be exercised in a manner reflecting its rationale, not so as to put residents outside the Brussels/Lugano sphere at a disadvantage compared with residents within. The distinction in the rules based on considerations of enforcement cannot be used to discriminate against those whose national origin is outside any Brussels or Lugano state on grounds unrelated to enforcement.
61. Returning to rules 25.15.1 and 25.13.1 and (2)(a) and (b), if the discretion to order security is to be exercised it should therefore be on objectively justified grounds relating to obstacles to or the burden of enforcement in the context of the particular foreign claimant or country concerned. The former principle was that, once the power to order security arose because of foreign residence, impecuniosity became one along with other material factors: …Thune…[1990] 1 WLR 562… This principle cannot …survive in an era which no longer permits discrimination in access to justice on grounds of national origin. Impecuniosity of an individual claimant resident within the jurisdiction or in a Brussels or Lugano state is not a basis for seeking security. Insolvent or impecunious companies present a different situation, since the power under CPR r 25.13(2)(c) applies to companies wherever incorporated and resident and is not discriminatory.
62. The justification for the discretion under rules 25.13(2)(a) and (b) and 25.15.1 in relation to individuals and companies ordinarily resident abroad is that in some – it may well be many – cases there are likely to be substantial obstacles to, or a substantial extra burden (eg, of costs or delay) in, enforcing an English judgment, significantly greater than there would be as regards a party resident in England or in a Brussels or Lugano state. In so far as impecuniosity may have a continuing relevance it is not on the ground that the claimant lacks apparent means to satisfy any judgment but on the ground (where this applies) that the effect of the impecuniosity would be either (i) to preclude or hinder or add to the burden of enforcement abroad against such assets as do exist abroad or (ii) as a practical matter, to make it more likely that the claimant would take advantage of any available opportunity to avoid or hinder such enforcement abroad.
63. It also follows…that there can be no inflexible assumption that there will in every case be substantial obstacles to enforcement against a foreign resident claimant in his or her (or in the case of a company its) country of foreign residence or wherever his, her or its assets may be. If the discretion under rule 25.13(2)(a) or (b) … is to be exercised, there must be a proper basis for considering that such obstacles may exist or that enforcement may be encumbered by some extra burden (such as costs or … simply delay).
64. The courts may and should, however, take notice of obvious realities without formal evidence. There are some parts of the world where the natural assumption would be without more that there would not just be substantial obstacles but complete impossibility of enforcement; and there are many cases where the natural assumption would be that enforcement would be cumbersome and involve a substantial extra burden of costs or delay. But in other cases … it may be incumbent on an applicant to show some basis for concluding that enforcement would face any substantial obstacle or extra burden meriting the protection of an order for security for costs…..If, for example, there is likely at the end of the day to be no obstacle to or difficulty about enforcement, but simply an extra burden in the form of costs …or moderate delay, the appropriate course could well be to limit the amount of the security ordered by reference to that potential burden.
67. The risk against which the present defendants are entitled to protection is thus not that the claimant will not have the assets to pay the costs, and not that the law of her state of residence will not recognise and enforce any judgment against her for costs. It is that the steps taken to enforce any such judgment in the United States will involve an extra burden in terms of costs and delay, compared with any equivalent steps that could be taken here or in any other Brussels/Lugano state. Any order for security … should be tailored in amount to reflect the nature and size of the risk against which it is designed to protect."
It will be appreciated that though CPR 25.13 has since been amended, for present purposes at least, its substance remains the same.
i) Given the extra burden of enforcement abroad, Nasser did not tell against security being ordered as a matter of the court's discretion. In particular, Mr Wheeler emphasised the need to enforce any order by action, the fact that the Claimant's assets might well not be in Hong Kong but elsewhere (for example, Crotex was in Russia); further, the Claimant's impecuniosity was likely to make such enforcement more difficult and result in the Claimant doing its best to resist enforcement of any order. Additionally, all this would of course produce delay.
ii) Nasser was only relevant to the exercise of discretion to order security, not to the quantum of security to be ordered once the decision has been taken to exercise the court's discretion; for this proposition, Mr. Wheeler relied on the observations of Clarke LJ in the unreported case of Hammond Suddard v Agrichem [2001] EWCA Civ 2065, at [26].
iii) Alternatively, the starting point for any order remained the costs of the action (put by the Defendant at some £500,000). While it may be that, if Nasser was applicable, any order must be related to the extra burden of enforcement abroad, Nasser did not require the order to be limited to the extra costs of enforcing abroad. Accordingly, the correct approach to the quantum of security was to award such proportion of the costs of the action as was necessary to protect the Defendant against the difficulties of enforcement elsewhere.
iv) On any view, a substantial award of security was appropriate to provide the necessary protection to the Defendant, given the likely difficulties of enforcement.
i) In the light of the Human Rights jurisprudence and, in particular, Art. 14 of the European Convention on Human Rights, discrimination in access to justice is not permitted on grounds of national origin.
ii) As is common ground, the Court does not have power, without more, to order security for costs against a claimant (individual or corporate), resident within the jurisdiction or relevant Contracting or Regulation States ("the zone").
iii) Accordingly, where the only threshold condition satisfied for ordering security for costs is CPR 25.13(2)(a), i.e., residence outside the zone, the Court's discretion cannot be exercised so as to discriminate between claimants (individual or corporate), who reside within or outside the zone. In consequence, the mere fact of such residence outside the zone cannot by itself justify an order for security for costs; that would amount (directly or indirectly) to discrimination on grounds of national origin unrelated to enforcement.
iv) In passing, it may be noted that no such concerns arise in connection with threshold condition CPR 25.13(2)(c), i.e., inability to pay, as this provision applies equally to companies resident within and outside the zone.
v) The surviving rationale for exercising the discretion under CPR 25.13(2)(a), to make an order for security for costs against a claimant resident outside the zone, is that enforcement of a judgment or order outside the zone may involve extra obstacles or extra burdens in terms of costs and delay, compared with enforcement within the zone. The word "may" is to be noted; there can be no "inflexible assumption" that enforcement outside the zone will carry with it any such extra obstacles or burdens: Nasser, at [63].
vi) As a matter of the "obvious realities" (Nasser, at [64]), in some jurisdictions outside the zone, it may be effectively impossible to enforce an order for the payment of costs. In such cases, there would be objective justification for the court exercising its discretion to make an order for payment of the full amount of costs likely to be ordered against a claimant if unsuccessful in the litigation.
vii) In other jurisdictions, the additional obstacles and burdens standing in the way of enforcement may be less substantial or even minimal. For example, in certain jurisdictions, of which it is common ground that Hong Kong is one, a judgment of an English Court for the payment of costs is enforceable by action and can only be resisted on the familiar and narrow grounds available at common law. In respect of such jurisdictions, the risk against which the applicant for security is to be protected is the extra burden of enforcement (such as it may be) compared to that which would have been encountered had enforcement taken place within the zone.
viii) The relevant comparison is between enforcement within the zone and enforcement in the country where enforcement will or may realistically be pursued, whether that is the country of residence of the claimant or the country where his, her or its assets may be: Nasser, at [63]. Of course, in an appropriate case, enforcement may take place both in the country of residence and in the country (or countries) where a claimant's assets are located. Given the focus on enforcement, the location of the claimant's assets is relevant and it is not discriminatory to take it into account; alternatively its relevance is objectively justified on grounds related to enforcement. I cannot accept Mr. Swaroop's submission that Nasser requires (as it were) a line to be drawn at the country of residence. The demands of practical justice point the other way; for example, it would be absurd to refuse an order for security for costs against a company claimant, resident outside the zone, on the ground that the obstacles to enforcement are minimal in its country of residence when its assets are situated in another country where it is well-known that enforcement is impossible. In this regard, I respectfully agree with Mr. Gabriel Moss QC when he said, in Aims Asset Management (supra), at pp. 6-7:
" The relevant risk relates to the question of enforcing judgment.... that risk in relation to enforcement must, in order to give the question of risk a practical content, relate to enforcement where the assets of the [..claimant..] are or are likely to be..."
I do not, with great respect, read the judgment of Jacob J., in Somerset-Leeke (supra) as containing any disagreement with this proposition as such.
ix) As to the applicant for security demonstrating the risk (Nasser, at [67]) of additional obstacles to or burdens of enforcement in a country outside the zone, evidential requirements will necessarily depend on the facts of the individual case: Nasser, at [64]. Satellite litigation is undesirable so that in some cases the Court will no doubt be content to take notice of obvious realities or to draw commonsense inferences, without formal evidence. But, ordinarily, even if the Court is minded to take a broad brush, commonsense approach, it will be necessary for the applicant at least to show some evidential basis for the conclusion that there would be a realistic risk of additional obstacles or burdens in the way of enforcement in a country outside the zone; it will be recollected that Nasser, at [63], precludes the Court from making any inflexible, generalised assumption.
x) Inescapably, Nasser is concerned both with the exercise of the Court's discretion and the quantum of security to be ordered. As to Mr. Wheeler's argument to the contrary, both the logic and language of Nasser are against him: see, for example, at [64]. For completeness, I am unable to accept that the observations of Clarke LJ in Hammond Suddard (supra), relied on by Mr. Wheeler, suggest otherwise. Clarke LJ said this:
" 26. It is not in dispute that the court has jurisdiction to make such an order under rr 25.13(2)(b) and 25.15(1). It is also conceded that it is appropriate for the court to make an order on the facts of this case. It follows that it is not necessary to consider the principles applicable to security for costs which are discussed in detail in ....Nasser. In the instant case the only issues between the parties under this head are in what amount security should be ordered and when. "
With respect, it seems plain that the Court of Appeal in Hammond Suddard was proceeding in the light of a concession there made (understandably, in the light of the application for a stay) and that Clarke LJ, had he intended a statement of principle as to the limits of Nasser, would not have confined himself to the observations in question.
xi) Nasser, where applicable, clearly points to relating the quantum of security to the extra burden of enforcement outside the zone, rather than to the likely costs of the case – though in jurisdictions where enforcement is effectively impossible, the two may be indistinguishable. It is neither here nor there that Nasser does not in all cases serve to limit the security to the amount of the extra burden; in certain situations, it may be wholly impractical to seek to do so. For the avoidance of doubt, save exceptionally, the Court is still likely to wish to have evidence of the likely costs of the case, (1) for reasons of proportionality, (2) as a cross-check and (3) because in some cases, as already discussed, it may remain appropriate to order security by reference to that sum.
(IV) QUANTUM
CONCLUSION