England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice
		7th March 2013

MR. JUSTICE BURTON:

1. This has been an application for security for costs by the Defendant, DTZ Debenham Tie Leung Ltd, in a claim brought against them by Irish Bank Resolution Corporation Ltd, which is due to come for trial in June. There are obviously substantial costs already incurred, although the slightly unusual feature of the case is that the Defendant is not intending to call, or rely upon, any factual witnesses in relation to the claim brought against it for professional negligence in the valuation of a development site in Lincolnshire, but is intending to rely only on an expert witness report to be served. The Claimant has already prepared its factual and expert witnesses. The Claimant asserts that that indicates that it has very strong merits in the claim, but I, clearly, am unable to resolve that question, and the parties, in the end, did not address me on merits or suggest what would in any even be relatively exceptional, namely that the merits, should impinge upon my conclusion with regard to security.
2. The law is not now in any dispute, there having been so many decisions on the question, and Mr. Freedman QC has referred me to the most recent setting out of the principles by Akenhead J in Phaestos Ltd v. Ho [2012] EWHC 662 at para.71, which seems in any event not to add much to the words of Sir George Jessel in Northampton Coal, Iron, and Waggon Co v Midland Waggon Company (1878) 7 Ch D 500, as long ago as 1878: where the Claimant company is in liquidation or, in any event, is insolvent, then there is an appropriate case for a defendant to bring an application for security for costs and, as a threshold requirement, the defendant must establish that there is reason to believe that the claimant will be unable to meet, or will be unable to satisfy, any costs order. There must be evidence that the company will be unable to pay, which is more than mere doubt or concern about the future ability to pay. The fact that the company is (as here) in liquidation is a good starting point for a Defendant. However, given that the well-established English principles are that the costs of an unsuccessful claim in an action adopted by a liquidator, therefore liable to pay costs to the successful defendant, will be priority costs in the liquidation, there needs to be something more than the statement that the company is in such liquidation before a judge can be satisfied that there is reason to believe that the claimant will be unable to meet any costs order.
3. In this case, although it has been known for some time that Anglo Irish Bank was in difficulties, it was apparently being supported by the Irish government and it was only the fact that on, I think, 7^th February 2013 the company was put into what appears to be accepted to be a unique form of Parliamentary-imposed liquidation by the Irish Bank Resolution Corporation Act 2013 which has caused the Defendant to bring this application for security for costs. The application came on two days ago in front of Christopher Clarke J and was adjourned for further evidence and has now come on before me.
4. Mr. Rhodri Davies QC, for the Defendant, asserts that he has satisfied the burden, and he very much relies upon the fact that because this is a unique liquidation, there must be some doubt, to put it at its lowest, as to whether the ordinary principles established in English law and, it is accepted, adopted in Irish law will apply, those principles, to which I have referred, being that the costs, of a successful defendant are recoverable as a priority cost in the liquidation, to include any costs incurred prior to the liquidation in relation to an action which has been adopted by the liquidator (see Norglen Ltd v. Reeds Rains Prudential Ltd [1999] 2 AC 1 at 21, which, it is accepted, is also the ordinary practice in Ireland). So Mr. Davies has concentrated vigorously on the potential doubt which arises by virtue of the special provisions of the 2013 Act.
5. The first question which he has raised is as to whether the litigation in Ireland should be treated as a voluntary or a compulsory liquidation. The expert from whom a report has been produced by the Claimant, Mr. Traynor, is clear that this is not a compulsory liquidation in the usual sense, although clearly it is not exactly a voluntary liquidation either. Mr. Davies refers to the provisions of s6(5) of the 2013 Act, which read as follows:

"The making of the Special Liquidation Order in relation to ... [the Claimant] ... shall, for the purposes of any enactment or rule of law or of any contract, deed or other agreement to which ... [the Claimant] ... is a party, have the same effect as if the Special Liquidation Order were the making of a winding up order by the Court or the appointment of an official liquidator."

That thus means that where there it is reference, for example, in a contract, to a compulsory winding up, the special liquidation order is to be treated as if it were so. But of course the fact that there is statutory provision that it should be treated as if it were a compulsory winding up order, where so referred to in such circumstances, does not mean that it is a compulsory winding up. What must be identified is what the provisions of the Irish Companies Act are which are to apply to this winding up, whatever it be. There is thus reference to the Companies Act 1963, which, in material part, is exhibited to Mr. Traynor's report. That can only be discovered by looking at the 2013 Act itself, and that is very clear because s10 of that Act applies and disapplies the various provisions of the Companies Act and, most significantly, there is express application of s280 of the Companies Act, indeed, amendment of it, so as to render it expressly applicable to the Claimant and its circumstances, in relation to this liquidation. S10 disapplies ss251 to 279, subsections (3) and (4) of s280 and ss282 to 282(d), all of which form part of the relevant chapter of the Companies Act 1963, so far as they relate to voluntary liquidations, but, as I said earlier, not only does not disapply but re-enacts by express amendment certain provisions which do apply to voluntary windings up, and applies them to this liquidation. They are in particular s280, to which I shall return, and s281, which reads, against the rubric, "Costs of voluntary winding up":

"All costs, charges and expenses properly incurred in the winding up, including the remuneration of the liquidator, shall be payable out of the assets of the company in priority to all other claims."

Also s.285, which sets out the provision in relation to preferential payments in a winding up.

6. S280, to which I have referred, is to be amended by reference to the Second Schedule to the 2013 Act, so as to read as follows:

"(1) The special liquidator appointed under section 7 of the ... [2013 Act] ... or any creditor may apply to the court to determine any question arising in the winding up of ... [the Claimant] ... and the special liquidator may apply to the court to exercise all or any of the powers which the court might exercise if ... [the Claimant] ... were being wound up by the court."

Subsection (2) survives, reading:

"The court, if satisfied that the determination of the question or the required exercise of power will be just and beneficial, may accede wholly or partially to the application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just."

7. The result, it seems to me, is quite clear, and that is that those relevant sections, including the provision for preferential treatment of costs, charges and expenses of the liquidator, which include the costs which the liquidator is liable to pay in respect of actions which he has adopted, are to be covered in this liquidation. Mr. Traynor also opines -and the expert for the Defendant, Ms. Niamh Counihan, a partner in Matheson & Co. solicitors, has not taken express issue with this -that the relevant Rules of the Irish court will also apply.
8. I am in no doubt at all that the Defendant has failed to satisfy the onus as to whether there is some doubt about the ability of the liquidator to use its assets to pay out, in priority to all other creditors, the costs to which the Defendant may, in the event, become entitled if it wins the action. I had, at the outset, suggested the possibility that there could be an application to the Irish court to put the matter beyond doubt, but what I had not appreciated when I made that suggestion is that the very section (s.280) which would be used for such an application is the section to which I have referred and forms part, on any basis, of the surviving provisions of the Companies Act applicable to this case, and I am in no doubt at all that there is no sufficient uncertainty raised by the Defendant as to what the outcome of that course would be, such as to render it necessary for me to adjourn to get that answer.
9. There is, in my judgment, a clear picture put forward by Mr. Traynor, and none of the speculation properly put forward by Ms. Counihan causes me to believe that the Defendant has satisfied the relevant onus, and that would apply to the costs prior to the liquidation because, as is clear, they had not accrued due prior to the liquidation, and, consequently, would fall, together with any other costs, as being liable to be paid as such priority.
10. The matter which has been raised by Ms. Counihan by way of a potential hamper on that outcome is the existence, in this case, of a floating charge in favour, I think, of the National Bank of Ireland, such that Ms. Counihan suggests it is possible that the ordinary principles of payment out of priority costs in the liquidation may be affected by some suggestion that the floating charge-holder would take priority over the priority debtors.
11. There is, at the moment, it seems to me, no doubt that, on the evidence I have seen, there is a sufficiency of assets to pay out the priority debtors absent this point. Mr. Davies says there is only evidence, at present, of about €175 million-worth of cash, but Mr. Freedman has pointed out that there is evidence that very substantial other assets fall to be recovered, and it is clear that the provisions of the Companies Act (as surviving) impose the obligation on the liquidator not to pay out any sums until the position, so far as priority debtors, is clarified -and I am in no doubt at all that that will mean that, come the end of this case in June, there will still be over-sufficiency of assets available. But Mr. Davies submits that the position may not be so clear if the floating charge-holder situation has to be taken into account.
12. There are two answers which Mr. Freedman makes to that. The first is the straightforward position, based upon his advice from Mr. Traynor, namely that the ordinary priority of costs will not be affected by the alleged entitlement of the floating charge-holder. In Ireland for many years, and in many decisions, although I have not been told of any appellate decision, the principle has been followed of not putting the position of floating charge-holders above the entitlement to priority debtors. The Court of Appeal decision in England of Re Barleycorn Enterprises Ltd [1972] All ER 155 has been regularly followed.
13. In this country, Re Barleycorn has, it seems, been overturned by the House of Lords decision in Re Leyland Daf Ltd [2004] 1 BCLC 281, in which, in relation to the facts of that case, the sums which had been incurred by the liquidator were not held to be recoverable in priority to the debts of the floating charge-holder. That is an English decision and it has subsequently, in England and Wales, been nullified by Parliamentary decision, that is the House of Lords in its legislative capacity (of course coupled with the House of Commons), because, as I have been told, the effect of Leyland Daf was statutorily reversed by the Companies Act 2006, s.128(2), inserting a new s.176(z)(a) into the Insolvency Act 1986, with effect from April 6^th, 2008.
14. But Ms. Counihan relates that her firm was recently involved in other insolvency litigation in Ireland, when an Irish High Court judge, very experienced in insolvency affairs, Finlay Geoghegan J, opined that it might be possible that Leyland Daf might have some impact in the position, albeit previously well established in the law of Ireland. It is not clear whether she was told that, even in England and Wales, Leyland Daf is no longer of any effect, but it seems possible that, at any rate, that learned judge would want to reconsider the position in future. But, as at present the Irish law is undoubtedly clear that Re Barleycorn prevails, and has been adopted for many years, and it is wholly unclear whether the Irish courts would wish to replace that system with a decision which, albeit given by the English House of Lords, has not proved popular or acceptable and is no longer the law in England and Wales. That is entirely speculative and, at the moment, I am satisfied that that is not the law of Ireland.
15. In any event, Mr. Freedman submits that, on the facts of Leyland Daf, the facts here, where the costs would be being incurred, unsuccessfully if such took place, in order to preserve the entirety of the assets -indeed to increase the entirety of the assets -of the Claimant company would be different from those in Leyland Daf, because it could be said that the costs had been incurred there for the benefit of the floating charge-holder. I do not need to decide that point and Mr. Davies, perfectly understandably, submitted that I had insufficient evidence before me to reach a conclusion in that regard. Suffice it to say that that speculative possibility, that Leyland Daf might have some impact on the priorities, is not one which I am satisfied begins to absolve the need for the Defendant to show that there is a real risk that there will be insufficient costs to satisfy his debt if he is successful at trial.
16. In all those circumstances, I am satisfied as to the position and I am unaffected by the fact that the arguments which I have canvassed and which at the moment have found unpersuasive could be put forward in Ireland by other third-party debtors. Clearly, if the action is successful in June, in the event, such third-party creditors would be wholly unlikely to be complaining. In those circumstances, this application for security is dismissed.