England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
COMMERCIAL COURT

		Rolls Building 7 Rolls Buildings Fetter Lane London EC4A 1NL
		14th February 2014

MR JUSTICE LEGGATT:

1. This is an application for security for costs. The argument has been longer and more involved than might ordinarily be the case because, for reasons which I will come to, there has, unusually, on this application been some investigation of the underlying merits of the claim. Because of the lateness of the hour, however, I will seek to give my decision and the reasons for it as succinctly as I can.

Factual Background

2. Summarising the facts very briefly, the claim arises out of a joint venture in Thailand which involved the establishment of a joint venture company called Dena Technology (Thailand) Ltd, the first claimant in this case. There were two partners or investors in the joint venture company. The first was the second claimant, whom I shall refer to as "4J". That company provided, as I understand it, the whole of the cash amounts invested - either directly or by borrowing from banks. The second joint venture partner was the first defendant, a company which at the time was called Dena Technology Ltd, and which I shall refer to as "Dena UK".
3. The second defendant, Dr Sulaiman, effectively owned and controlled Dena UK. The contribution to the joint venture made by Dena UK was to sell to the joint venture company, at what was said to be a substantial discount, two production lines which would be used for the manufacture of a wood substitute product. The underlying concept was to recycle material such as and including used rubber tyres into products which were supposed to be similar in their properties to wood. What is alleged by the claimants is that 4J was induced to invest in the joint venture and the joint venture company was induced to purchase the production lines by misrepresentations which were fraudulent. It is said that Dr Sulaiman himself is personally liable for making those representations, as also is his company Dena UK. Dena UK is, however, now in liquidation and so for practical purposes the claim is against Dr Sulaiman personally.
4. A large number of misrepresentations are alleged in the particulars of claim but very broadly they fall into two categories. First of all, it is alleged that Dr Sulaiman dishonestly sold a technology to the claimants on the basis that it was commercially viable when in truth it was not. There is a substantial dispute about that and it is not possible or appropriate for me to form any prima facie view about the rights or wrongs of it on this application. Broadly, the claimants allege that, whereas Dr Sulaiman had represented to them that he would be providing production lines containing a special nano-reactor and patented nano- technology owned by Dr Sulaiman, all they in fact got were two common or garden production lines, if I can call them that, made in China. Dr Sulaiman replies that the claim is based on a misunderstanding and that there was never anything special promised about the production lines themselves. What was special and patented was the technology involved in making one of the additives that would be used in the manufacturing process, and the reason why no commercially viable product was in fact produced was because the claimants failed to operate the equipment properly. All that is in dispute between the parties, as I say, and is not something which it is suggested that the Court can investigate in the context of an application for security for costs.
5. However, the claimants also rely as part of their claim on certain representations made in the course of the contractual negotiations which they say amounted to representations that Dr Sulaiman and his company had experience in the application of the technology in question for the manufacture of wood replacement products. The claimants say that they can demonstrate very readily at least a strong prima facie case that two representations in particular were fraudulent and that on the material available at present there appears to be no real answer to the claim based on those misrepresentations.

The Application

6. Dr Sulaiman seeks an order for security for costs under CPR 25.13(a) on the basis that the claimants are both resident in Thailand and/or under CPR 25.13(c) on the ground that there is reason to believe that the claimants will be unable to pay Dr Sulaiman's costs if ordered to do so. It is common ground that both these conditions are satisfied. The only issue is whether it is just to order security as a matter of the court's discretion.

Approach to the merits

7. The principles which govern the exercise of that discretion are well known and need not be recited. In particular, it is well established that the Court should not go into the merits of the claim in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure; see, for example, the case of Porzelack KG v Porzelack (UK) Limited [1987] 1 All ER 1074 at 1077, and Keary Developments Ltd v Tarmac Construction Ltd [1993] All ER 534 at 540.
8. Appendix 16 to the Commercial Court's guide at paragraph 4 states that:

'Investigation of the merits of the case on an application for security is strongly discouraged. It is usually only in those cases where it can be shown without detailed investigation of evidence or law that the claim is certain or almost certain to succeed or fail that the merits be taken into consideration'.

I am not sure what standing the Commercial Court guide has, if any, to vary the test established in the case law, but the point is well made that it is a rare case in which investigation of the merits in the context of an application for security will be appropriate. I am nevertheless persuaded that this is one of those rare cases in which the merits can properly be taken into account.

Evidence of fraud

9. I mentioned earlier that there are two particular representations which the claimants say they can readily show were to a high degree of probability fraudulent and likely to have induced them to enter into the joint venture. The first was made in January 2010 when 4J first expressed interest in the technology which Dr Sulaiman was seeking to sell to them. On 22 January 2010 an email was sent to 4Jby Dr Sulaiman's personal assistant which stated that 'To give you an illustration of the types of finished products our process can produce, please see the attached file which shows some examples.' Attached to that email was a brochure. The brochure was produced with the logo of Dena UK, the first defendant company, and was entitled, 'Finished products and production areas.' The brochure included descriptions and photographs of various products. The claimants say that it was thereby clearly represented that the products shown in the brochure had been produced and were examples of products produced using Dena UK's technology. In fact, they say, that was not the case: the products shown in the photographs were products which had been made by an entirely different American company not using Dena UK's technology.
10. In his defence and counterclaim what Dr Sulaiman says about that allegation at paragraph 36(e) is as follows:

'It is admitted that the brochure contained photographs which were intended to illustrate the type and range of products which might be manufactured using the processes developed by the defendants using the said nano-technology, but denied that Dr Sulaiman thereby represented that the photographs were of products which had been manufactured by Dena UK or on production lines manufactured by Dena UK. Indeed Dr Sulaiman made clear to Mr Bhakdibhumi that the brochure contained only examples of possibilities not particular products and that there were a huge variety of potential products which could be made on the production lines determined by the type of mould manufactured and used in the lines.'

11. There will clearly in due course be other evidence, but on the evidence before the Court today - in particular the email and brochure - I am unable to accept that any reasonable recipient of that email would have understood the products featured in the brochure to be anything other than examples of products which had actually been produced using Dena UK's technology. On the face of it, therefore, since Dr Sulaiman evidently accepts that that is not the case, I find it difficult to see how the representations made by Dena UK in those communications were other than fraudulent.
12. The second representation was made at a later stage of the negotiations when the bank which was potentially providing funds for the joint venture asked for documents evidencing a specimen sale of products made by Dena UK to another customer. 4J in turn by an email dated 26 August 2010 requested from Dr Sulaiman '(1) a copy of a sales receipt for wood replacement products which had been sold by Dena, and (2) a copy of a purchase order for wood replacement products which are currently ordered to Dena.' In response to that request, documents were provided by Dr Sulaiman's personal assistant consisting of what appeared to be a purchase order dated 12 January 2010 requesting a purchase of wood replacement products from Dena UK, that purchase order being issued by the Kempinski Hotel in Jordan. The second document provided purported to be a receipt issued by Dena UK to the Kempinski Hotel for payment for the products requested in the purchase order.
13. The claimant's solicitor, Ms Vallotton, in her witness statement says that she has made enquiries of the Kempinski Hotel in Jordan who said that they had never placed such an order. She also gives evidence that she requested permission from the liquidators of Dena UK to inspect its bank statements and was permitted to do so on 12 November 2013 and can confirm that those bank statements did not show any receipt for the relevant amount from the Kempinski Hotel or anyone else in or around March 2010, that being the date of the purported receipt for payment.
14. In the defence and counterclaim all that Dr Sulaiman says about that allegation is that it is not admitted and that, to the best of his recollection, Dena UK did not sell any products directly to the Kempinski Hotel in Ishtar. Since Dr Sulaiman accepts that Dena UK did not sell any products to the Kempinski Hotel in Ishtar, one would expect him to offer some form of explanation as to how his personal assistant came to produce documents which purported to evidence exactly such a sale. However, despite requests for more information on that question, none has so far been provided. It may turn out in due course that there is an honest explanation for the production of those documents; however, despite an opportunity to do so, Dr Sulaiman has so far failed to provide one.
15. On the present state of the evidence I am again drawn to the conclusion that there is a high probability of establishing fraud.
16. There is a third relevant transaction. This occurred some two years later and is therefore not a matter which can be said to have induced the making of the joint venture agreement or the agreement to purchase the production lines. It is nonetheless said that it induced 4J to go on paying instalments for the purchase of the production lines, not all of which had yet been paid at the relevant time. It is also relevant, in my view, because I regard it as relevant for these purposes to look at all these transactions together. Even if each on its own might not be sufficient to raise a prima facie case of fraud to the relevant high standard, when one has three examples of what appears to be fraud, it seems to me that they are mutually reinforcing.
17. The third matter relied on is an alleged representation that Dr Sulaiman and Dena UK had secured a client or prospective client for the joint venture company, being a company called Campaign Land Ltd. In the defence and counterclaim, in relation to that allegation at paragraph 41(f), it is admitted that Dr Sulaiman in an email dated 12 April 2012 stated that Campaign Land was a potential customer of the joint venture company which was interested in the type of wood replacement products it might make and indicated that Campaign Land had already committed to buying like products from Dena UK. In response to that email Mr Bhakdibhumi asked for a copy of a sales contract between Campaign Land and Dena UK and evidence of a payment made by Campaign Land to Dena UK for such products. These documents were duly produced. What Dr Sulaiman did not mention was that Campaign Land was another company which he owned and controlled. What was presented, therefore, on its face as being an arm's length transaction was in truth no such thing. Moreover, Ms Vallatton gives evidence that, when she was permitted to inspect the bank statements of Dena UK, they showed no receipt for the sum of £86,400 from Campaign Land or anyone else in or around March 2012 (that being the date of the purported payment).
18. On the face of the present evidence, therefore, it appears that not only was the status of Campaign Land as a customer misrepresented but there was in fact no actual transaction, contrary to what 4J was told.
19. As I say, all those matters when taken together seem to me, unless and until they are rebutted by evidence in answer, to raise a case of fraud which does have a high probability of success. For those reasons I consider that this is an unusual case in which I can and should take into account the merits in deciding what order to make for security.

Alleged abuse of process

20. Other matters are also relied on by Miss Wood on behalf of the claimants. First, it is submitted that Dr Sulaiman abused the process of the Court at the pre-action stage. On 21 March 2013 the claimants' solicitors sent a letter before action to the defendants' then solicitors. It was a detailed letter setting out the prospective claims including allegations of fraudulent misrepresentation. The defendants' then solicitors responded on 26 March 2013 saying that they would need to take instructions. In a subsequent letter dated 5 May 2013 they said that they would need until 28 June 2013 in order to prepare a response for various reasons, one of which was that Dr Sulaiman would need time to review the substantial relevant documentation in the case. The claimants' solicitors responded by agreeing to an extension of time only until 10 May 2013, and there is no evidence before the Court of any subsequent letters exchanged between the parties. The 10 May and 28 June dates came and went, however, with no response to the letter of claim. The claimants then served the claim form in July but in the meantime the first defendant company had gone into liquidation. It seems that Dr Sulaiman also changed the name of the company before that happened and has used the name of the Dena UK company or a similar name for another company which he has established - which is said to have been unlawful. There is also evidence that he transferred the assets of Dena UK, which were valued on a break-up basis at only £13,000, to another company which he owned or controlled.
21. In these circumstances the allegation made is that Dr Sulaiman had no bona fide intention of responding to the letter of claim, but simply used the promise of a response as an opportunity to strip assets out of Dena UK in order to defeat any potential claim.
22. I do not consider that on the evidence relied on by the claimants there is an adequate basis for drawing that inference. In the first place, according to that evidence the sole assets of Dena UK were worth just over £13,000, so it can hardly be suggested that significant assets were being stripped and money put beyond the reach of the claimants. Second, since it appears that Dena UK had no other business prospects apart from any profits which it had received or hoped in the future to receive from the claimants, there is no necessary inference that there was any connection between going into liquidation and the intimation of the claim. There is no basis on which I can infer that the company would not have gone into liquidation at the time it did in any event. Third, since allegations of fraudulent misrepresentation were made in the letter of claim against Dr Sulaiman personally, it was plain that there would be a personal claim against him whether or not there was any viable claim against his company. In those circumstances I do not consider that the allegation of asset-stripping is borne out or is a matter to which I can give any credence for today's purposes.

The claimants' fin ancial means

23. The final area which has been the subject of argument is the ability of the claimants to provide security for costs. It is common ground that the joint venture company itself is effectively insolvent because the joint venture failed. It is equally clear that the second claimant, 4J, has no ability to fund this litigation. On behalf of the claimants, Miss Wood argued that, in assessing the justice of the case, account should be taken of the fact that the claimants' impecuniosity has, if their case is correct, been brought about by Dr Sulaiman's conduct: see Sir Lindsay Parkinson v Triplan [1973] QB 609, 626G, per Lord Denning MR. That fact provides an additional reason for reflecting the court's assessment of the merits in the order made where, as here, it is possible to form a strong provisional view. However, since its force depends on the claim being valid, it would not be right to give it weight independently of that assessment.
24. As I see it, the claimants' impecuniosity is otherwise relevant only insofar as it is shown that ordering security would prevent them from pursuing their claims because no other funding is available. That is not the position here.
25. This litigation is being funded, as the claimants have explained, by an associated company called Sahachart Sethakit Co, another Thai company. Accounts of Sahachart have been disclosed covering an 11-month period to 13 November 2013. Those accounts show a net profit for that period of, in sterling terms, £2.1 million on income of approximately £10.9 million. They also show that as at 31 December 2012 Sahachart had total assets of approximately £11.7 million. What is said in the witness statement of Ms Vallotton is that nonetheless Sahachart has little cash available. At paragraph 16 she says:

'I am informed by Colonel Bhakdibhumi that Sahachart is happy to provide a corporate guarantee to fund a payment of £10,000 into court if required to do so. However, in the event that a cash payment of £100,000 is required and, inevitably, increased to a multiple of this sum as the proceedings progress … that would exceed Saharchart's cash assets and make it extremely difficult for Saharchart to continue funding the claims (which it would otherwise be able to do using the cash-flow generated by monthly trading).'

26. I should mention that the cash assets disclosed in the auditor's accounts for the year ended 31 July 2012 consisted of cash and bank deposits of approximately £220,000.
27. In paragraph 17 Ms Vellotton goes on to say:

'I am further informed by Colonel Bhakdibhumithat he has been advised by Sahachart's bankers (Bangkok Bank, which has a branch in London) that any guarantee provided by Sahachart would have to be cash-backed and would accordingly tie up the cash assets of Sahachart. … I am instructed that in the event that they were required to provide substantial cash security in the order of £100,000 or more, it is probable that the board will cease to provide further funding for the claims.'

28. That last piece of evidence is a statement that, if required to provide security of £100,000 or more, Sahachart would probably decline to do so and would choose not to further fund the claimants; but there is no evidence before the Court that would enable me to conclude that Sarachart is unable to provide security of £100,000 or more, if it thought it worthwhile to do so. On the face of it, a company with assets as substantial as those of Sarachart, and generating profits as substantial as the company is, could be expected to have the means to put up £100,000 in cash in order to back a bank guarantee in London, and to leave that amount tied up as it no doubt would be for the duration of the litigation.
29. I therefore would not be willing to conclude that it would stifle the claim if security in this amount were ordered.
30. If the application were brought solely on the ground that the claimants are resident abroad, Dr Sulaiman could only seek security to reflect the additional costs and risks of enforcing an English costs order in Thailand. However, there are experts on Thai law advising each side in this case. They both agree that an English judgment is not in itself enforceable in Thailand. An order for costs in the present action would therefore not be enforceable in Thailand. Mr Thompson submits, and I accept, that that leads to the conclusion that, except in so far as there is security for costs of the claim provided, there is no reason to think that Dr Sulaiman, if successful in his defence, would have any prospect of recovering these costs- not only because the claimants themselves have no money to pay costs but because, even if he could get an order for costs against Sarachart on the basis that they were third-party funders, that order would not be enforceable in Thailand.

Conclusion

31. On the present evidence, as I have indicated, it does not seem to me likely that Dr Sulaiman will succeed in his defence. Nevertheless, I do not consider that my view of the merits formed on necessarily limited material at this stage should entirely deprive the defendants of any security for their costs. It is a factor which I think I should take into account in exercising my discretion as to what is the appropriate amount of security to order. Had it not been for the view I have taken of the merits, I would have made an order for security to be provided in the sum of the £100,000 asked for, but on the basis of my view of the prospects of success of the claim, I think it appropriate to discount that by 50%, and the sum which in the circumstances I will order to be provided is therefore the sum of £50,000.