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Cite as: [1998] IESC 21

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Irish Press plc v. E.M.Warburg Pincus and Co. International Ltd. [1998] IESC 21 (29th July, 1998)

O'Flaherty J.

Murphy J.

Lynch J.

141/97

THE SUPREME COURT

BETWEEN/

IRISH PRESS PUBLIC LIMITED COMPANY

Plaintiff/Respondent

AND

E.M. WARBURG PINCUS AND CO.

INTERNATIONAL LIMITED

WARBURG PINCUS AND CO.,

E.M.WARBURG PINCUS AND CO. INC.,

WARBURG PINCUS PARTNERS L.P.,

WARBURG PINCUS COMPANY L.P.,

IPL (1991) LIMITED, GORDON BRUNTON,

RALPH INGERSOLL, JOHN ROGER NICHOLSON

AND BARBERA MANFREY

Defendants/Appellants

Judgment delivered the 29 ^th day of July 1998 by Lynch J [O’Flaherty J and Murphy J concurring]:

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LYNCH J .

1. This is an appeal from a judgment and order of the High Court (McGuinness J.) given on the 12th day of March 1997 whereby she refused an application by the defendants/appellants for an order pursuant to s. 390 of the Companies Act, 1963 directing the plaintiffs/respondents to give sufficient security for the costs of the appellants in these proceedings and staying the further prosecution of the proceedings until the said security be given.

THE FACTUAL BACKGROUND

2. The respondents’ claim against the appellants is for damages for alleged negligent advice, misrepresentation and breach of fiduciary duty as a result of which the respondents say that they entered into a joint venture arrangement with the appellant Ralph Ingersoll(the eighth defendant/appellant) and companies controlled by him: this joint venture turned out to be a disastrous venture for the respondents and they allege that at the time when the appellants advised

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the respondents and represented to them that the Ingersoll companies were a financially sound and thriving business they were in fact in serious financial difficulties and losing many millions of U.S. dollars per year. The respondents further allege that their losses were established in the High Court in proceedings against the Ingersoll companies and others pursuant to s. 205 of the Companies Act, 1963 at over £6m., although the High Court award of such sums was set aside by the Supreme Court on the basis that damages were not a remedy available in proceedings under s. 205 of the 1963 Act. (See [1995] 2 IR p. 175).

3. The respondents allege that those damages were caused to them by the negligent advice, misrepresentation and breach of fiduciary duty of the appellants, especially in writing to them on the 20th December 1988 as follows:

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“At the suggestion of Sir Gordon Brunton and Roger Nicholson, I am writing to you regarding the financial resources of Ingersoll Publications Limited, with which I understand you are currently discussing a potential collaboration. The Ingersoll group of companies is not quoted. Accordingly, I hope that the following information, taken with the information from the corporate brochure, will give you a feeling for the scale and the growing strength of the group.

My firm, F.M. Warburg, Pincus and Co. Inc., has been actively involved with Ralph Ingersoll since 1983 when we created our first joint venture, Ingersoll Newspapers Inc. in which Ralph Ingersoll and his talented team provided management expertise and Warburg, Pincus provided the required equity capital. This highly successful venture was followed by two additional and equally promising joint ventures, Community Newspapers

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Inc. and Ingersoll Publications Limited both of which were established in 1987.

Warburg, Pincus, a specialised financial services firm whose primary activity is venture banking, manages through a small number of funds a total venture capital portfolio in excess of 1.5 billion dollars. Through these funds, Warburg, Pincus has provided approximately 200m. dollars of equity capital to the three Ingersoll entities to assist them in their acquisition programmes over the past five years.

Warburg, Pincus has indicated its willingness to continue funding attractive acquisition candidates identified by the Ingersoll Group in the United Kingdom and elsewhere in the world.

Ingersoll Publications Limited, the entity through which the Ingersoll organisation is undertaking its European activities, has substantial paid in capital,

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and since inception has generated earnings and cash flow which have exceeded our expectations.

Please feel free to contact me if you require any additional information.

Yours sincerely

Barbara L. Manfrey

Managing Director.”

4. Dr. Eamon de Valera managing director and secretary of the respondents has exhibited in his affidavit of the 19th December 1996 copy accounts of Community Newspapers Inc. (one of the companies referred to in the said letter of the 20th December 1998) for the 181/2 months period from the 15th May 1987 to the 31st December 1988 which show a loss incurred for that period of 62,459,536 dollars. It is clear therefore that the respondents have a stateable case in these proceedings against the appellants. It is also clear from the affidavits filed on behalf of the appellants that they have a stateable defence to the respondents’ claim.

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THE LAW AND GENERAL CONSIDERATIONS

S. 390 of the Companies Act, 1963 provides as follows:

“Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter, may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs and may stay all proceedings until the security is given.”

5. In most cases which come before the Supreme Court on applications under this section, little or no issue arises as to the inability of the plaintiff company to pay the costs of a successful defendant. Therefore the only issue in such cases is whether or not there are special circumstances to justify not making an order for security for costs, such special circumstances usually being a contention by the plaintiff company that the

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very wrong complained of by it is the cause of its impecuniosity and inability to pay costs.

6. This case is somewhat different. The primary answer of the respondents to the appellants’ claim for an order for security for costs is that they will be able to pay the costs of the appellants if the latter are successful in their defence. The respondents further say however that if the Court comes to the conclusion that they will not be able to pay such costs, then the cause of their inability to pay is due to their involvement with the Ingersoll companies, an involvement into which they were led and induced by the negligent advice, misrepresentation and breach of fiduciary duty on the part of the appellants and that they the respondents should therefore be excused from having to give security for the appellants’ costs in those circumstances. The onus of proving inability to pay is on the

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appellants: if the appellants establish such inability to pay, the onus of proving special circumstances is on the respondents.

7. The learned High Court judge concluded her judgment as follows:

“On reading all the helpful authorities to which counsel have referred me, I also gain the impression that on balance the courts have tended to lean against the making of orders for security for costs. In his judgment in the Supreme Court in the case of S.E.E. Company v. Public Lighting Services [1987] ILRM 255 at 258 McCarthy J. said:

‘The argument that the section of the Companies Act is mandatory was rejected in Peppard v. Bogoff [1962] IR 180. The consequent discretionary nature of the order is emphasised when read in the light of the constitutional right of access to the Court, a right not limited to the High Court, and the nature of the right of appeal to this Court as provided by Article 34.4.3 of the Constitution

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The learned McCarthy J. in the same judgment also referred to the ‘David and Goliath scenario that seems to mark applications under the sections of the Companies Act’. While I accept, as was submitted by counsel for the defendants in this case, that the constitutional right of access to the courts is primarily available to natural persons and that the courts must be careful not to render section 390 nugatory, it seems to me that in his judgment the learned McCarthy J. is expressing the general tenure of judgments in this Court and in the Supreme Court in regard to security for costs under section 390 of the Companies Act, 1963.

On the balance of the evidence available I feel that the plaintiff has sufficient resources to meet the defendants’ costs in the proceedings in this Court, should such costs be awarded against the plaintiff It does not seem to me that the liabilities of the plaintiff company itself are such as to materially alter this position and I would anticipate that the out

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goings of the plaintiff in the fairly immediate future should not be extraordinarily heavy. On the balance of the evidence, therefore, I will refuse the order sought.

Since I have decided the matter on this ground, I do not need to consider the alternative submission of the plaintiff that any impecuniosity of the plaintiff is due to the defendants’ wrongful acts and I express no opinion on this ground.”

8. If this Court should hold with the appellants on this appeal, then it would be necessary to send the case back to the High Court to determine the issue of special circumstances or not.

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SUBMISSIONS

9. Mr. Collins, S.C. for the appellants submitted that the financial history of the respondents shows declining net assets and as the respondents are not trading this must inevitably continue especially as litigation costs are also being incurred by the respondents and were not taken into account by the learned High Court judge; moreover such assets as exist are in subsidiary companies and there would be a cost incurred in getting them into the respondents to enable payment to be made: the learned High Court judge wrongly stated that courts tended to lean against the making of orders for security for costs.

10. Mr. Allen, S.C. for the respondents submitted that the onus of proof was as I have already stated it to be above: further that the affidavits filed on behalf of the respondents and the accounts therein exhibited showed sufficient net assets to meet the appellants’ costs if successful in their

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defence: and he also made submissions on the issue of special circumstances.

CONCLUSIONS

11. I have come to the conclusion that there was sufficient evidence to support the finding of the learned High Court judge. I do not think that there is any substance in the point that the learned High Court judge said that courts lean against granting security: it seems to me that this was said in the context really that the onus of proof must be discharged by the defendant and could not be said to vitiate the judgment.

12. There is no doubt but that the financial position of the respondents on the accounts for the year ending the 31st March 1996 which were the latest accounts available to the learned High Court judge showed a borderline financial position so far as ability to pay the appellants’ costs if successful is concerned but since the High Court hearing accounts for the

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year ending the 31st March 1997 and draft accounts for the year ending the 31st March 1998 have become available and were produced and considered by this Court by consent of the parties. It seems sensible to review the position now in the light of these later accounts and especially the draft accounts for the year ending the 31st March 1998.

13. There have been revaluations and/or realisations by the respondents of their financial assets in recent years. In so far as these are revaluations they have been accepted by the auditors who are a well known and reputable firm as proper, doubtless in the light of substantial gains made in the Stock Market over the past few years. The draft accounts for the year ending the 31st March 1998 for the group of companies of which the respondents are the parent company show total assets less current liabilities in the sum of £2,556,000.

14. If one deducts from this figure long term creditors whose claims fall due after more than one year in the sum of

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15. £350,000 as shown in the draft accounts, one is still left with total assets after deduction of all liabilities, current and long-term, in a sum of £2,206,000.

16. This figure may seem more than adequate to enable the respondents to pay the appellants’ costs if and when the appellants are successful in their defence.

17. Nevertheless, the submission of Mr. Collins that there is a constant loss to the respondents and drain on their assets because they are incurring expenses and not trading to generate profits is a valid submission. The draft profit and loss accounts show “general expenses £370,000” and “interest payable £91,000” which makes a total of £461,000. The only regular and reliable source of yearly income appears to be “interest and dividends received £126,000” as shown in the group cash flow statement and also at note 2 of the draft accounts. The foregoing figures

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would leave a deficit of £335,000 on recurring annual out goings when annual receipts are deducted.

18. Obviously, it behoves the directors to trim their sails so long as the respondents and their subsidiaries are not trading in order to achieve a situation that normal out goings and expenses fall within the total of interest and dividends receivable. Even then, the respondents own costs of the current litigation will be a drain on their resources especially if the appellants should ultimately succeed in their defence. As against the foregoing, however £253,000 was recovered by the respondents in the year 1997 in respect of a debt of £688,000 due by Irish Press Newspapers Limited which is in liquidation and which debt had been written off: a further and final payment of £200,000 will be made in the near future.

19. It follows from all the foregoing that the respondents would certainly be able to pay the costs of the appellants if such costs were awarded now

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and furthermore that they will be able to pay those costs if awarded within the next two years or so. This will not always remain the position however if, for example, the case were to drag on for another three or four years with a continuing drain on the respondents’ resources the case being already over three years in existence since the issue of the plenary summons.

20. In the ultimate analysis, however, the appellants have not established by credible testimony that there is reason to believe that the respondents will be unable to pay the costs of the appellants if successful in their defence and accordingly the appeal must be dismissed.