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Cite as: [1999] UR 45

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ROYAL COURT

(Samedi Division)

4 March 1999

Before: Bryan Ian Le Marquand, Greffier Substitute

BetweenL’Eau des Iles Jersey Limited Plaintiff

AndAE Smith & Sons Limited Defendant

(by original action)

AND

BetweenAE Smith & Sons LimitedPlaintiff

AndL’Eau des Iles Jersey LimitedDefendant

(by counterclaim)

Application of the Defendant in the original action (hereinafter referred to as "the Defendant") for an Order for further security for their costs up to the conclusion of this action.

Advocate PC Sinel for the Defendant

Advocate MJ Thompson for the Plaintiff in the original action

(hereinafter referred to as "the Plaintiff")

JUDGMENT

THE GREFFIER SUBSITITUTE: This action relates to a written contract which was entered into between the parties on 24 March 1993. The written contract related to the supply of water to be made by the Plaintiff which would be bottled, marketed and sold by the Defendant. A significant issue between the parties at trial will be the question as to whether the water delivered by the Plaintiff was potable (subject to the removal of manganese to acceptable levels). The Defendant alleges that it was not potable and that, therefore, it was entitled and has rescinded the contract as this constituted a fundamental breach of warranty on the part of the Plaintiff. In addition to defending the action the Defendant has brought a counterclaim seeking damages.

On 13 November 1996, I delivered a judgment in relation to the application of the Defendant for security for its costs up to the close of inspection of documents. Subsequently, on 19 November 1996, I ordered that the Plaintiff furnish the Defendant with security for its costs in relation to the original action up to the close of inspection of documents by paying to the Judicial Greffier the sum of £7,500 within 2 months from the date of the Order. The Plaintiff subsequently complied with the terms of that Order by making the said payment. The application before me on 22 February 1999, was an application by the Defendant for security for its costs up to the conclusion of this action.

I do not propose to set out again the general principles in relation to the ordering of security for costs where the Plaintiff is an impecunious company which are set out on pages 2 to 7 of the Unreported Judgment dated 13 November 1996, as there has been no material change of circumstances. However, the issue as to whether the ordering of security for costs will be oppressive and will have the effect of stifling the action, which arose on the first application, arises equally on this application.

In the case of Mayo and others v. Cantrade Private Bank Switzerland (CI) Limited and another (31 May 1996) Jersey Unreported, the Royal Court heard an appeal from one of my decisions and, whilst overturning my decision on the facts, upheld my view of the law. My Judgment which was attached as an Appendix to the Judgment of the Royal Court, contained a number of quotations from the important English Court of Appeal case of Keary Developments Limited v Tarmac Construction Limited (1995) 3 All ER 534 and I am now setting out a number of these below.

There is the following important section from the head note which reads as follows:-

"In exercising its discretion under s 726(1) of the Companies Act 1985 to order a plaintiff company in an action to make a payment of security for the defendant’s costs where it appears that the company may be unable to pay such costs if the defendant is successful in his defence the court will have regard to all the circumstances of the case. The court will not be prevented from ordering security simply on the ground that it would deter the plaintiff from pursuing its claim. Instead, the court must balance the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security against 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 his defence of the claim. In considering all the circumstances, the court will have regard to the plaintiff companys prospects of success but without going into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure. Account should also be taken of the conduct of the litigation, including any open offer or payment into court, any changes of stance by the parties and the lateness of the application, if appropriate. The court will not refuse to order security on the ground that it would unfairly stifle a valid claim unless it is satisfied that in all the circumstances, including whether the company can fund the litigation from outside sources, it is probable that the claim would be stifled. In this regard it is for the plaintiff company to satisfy the court that it would be prevented by an order for security from continuing the litigation. In considering the amount of security that might be ordered the court will have regard to the fact that it is not required to order the full amount claimed by way of security and it is not even bound to make an order of a substantial amount."

The core of the Keary -v- Tarmac Judgment is found in seven sections which commence at letter h on page 539 and I am now going to quote from sections 2,3 and 6 thereof which are particularly relevant.

"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 (see Okotcha v Voest Alpine Intertrading GmbH [1993] BCLC 474 at 479 per Bingham LJ, with whom Steyn LJ agreed). 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 (see Pearson v Naydler [1977] 3 All ER at 536-537, [1977] 1 WLR 899 at 906 per Megarry V-C).

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 for security. Against that, it must weigh the injustice to the defendant if no security is ordered and at the trial the plaintiffs claim fails and the defendant finds himself unable to recover from the plaintiff the costs which have been incurred by him in his 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 tour company, particularly when the failure to meet that claim might in itself have been a material cause of the plaintiffs impecuniosity (see Farrer v Lacy, Hartland & Co (1885) 28 Ch D 482 at 485 per Bowen LJ). 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 (see Pearson v Naydler [1977] 3 All ER 531 at 537, [1977] 1 WLR 899 at 906).

Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled. There may be cases where this can properly be inferred without direct evidence (see Trident International Freight Services Ltd v Manchester Ship Canal Co [1990] BCLC 263). In the Trident case there was evidence to show that the company was no longer trading, and that it had previously received support from another company which was a creditor of the plaintiff company and therefore had an interest in the plaintiffs claim continuing; but the judge in that case did not think, on the evidence, that the company could be relied upon to provide further assistance to the plaintiff, and that was a finding which, this court held, could not be challenged on appeal.

However the court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons. As this is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation (see Flender Werft AG v Aegean Maritime Ltd [1990] 2 Lloyds Rep 27). In that case Saville J applied by way of analogy the approach adopted in another context, that of payment into court as a condition of leave to defend. In M V Yorke Motors (a firm) v Edwards [1982] 1 All ER 1024 at 1028, [1982] 1 WLR 444 at 449, 450 Lord Diplock approved the remarks of Brandon LJ in the Court of Appeal:

"The fact that the man has no capital of his own does not mean that he cannot raise any capital; he may have friends, he may have business associates, he may have relatives, all of whom can help him in his hour of need."

In Kloeckner & Co AG v Gatoil Overseas Inc [1990] CA Transcript 250 Bingham LJ cited with approval certain remarks of the Registrar of Civil Appeals. Mr Registrar Adams was willing to assume that the situation before him was the same as that exemplified in the Farrer case, that is to say that there was a probability that the defendant wrongly caused the plaintiffs impecuniosity on the basis of which security for costs was being sought. The registrar said:

"In my Judgment, the approach to be adopted in cases where, as here, there are good arguable grounds of appeal and its is within the Farrer principle but the appellant contends that the award of security will stifle the appeal, should be the same as the approach adopted in M V Yorke Motors (a firm) v Edwards Ord 14 cases, where conditional leave to defend is being comtemplated. The approach, in my view, should be that the onus is on the appellant to satisfy the Court of Appeal that the award of security for costs would prevent the appeal from being pursued, and that it is not sufficient for an appellant to show that he does not have the assets in his own personal resources. As in the Yorke Motors case, the appellant must, in my view, show not only that he does not have the money himself, but that he is unable to raise the money from anywhere else.""

A substantial issue arose between those appearing before me as to the distinction between stifling/oppression on the one hand and an order which would deter a party from pursuing its claim. This arose because Advocate Thompson argued that if I were to order the beneficial owner of the Plaintiff, Mr Jolyon Baker, to give a charge over his property by way of guarantee of future liabilities of the Plaintiff for costs in the original action, then that would have the effect of stifling the action because Mr Jolyon Baker would not be prepared to take the risk of seriously jeopardising his family finances by risking having to personally satisfy a substantial order for costs. Advocate Thompson drew an analogy with the case of Trident International Freight Services Limited -v- Manchester Ship Canal Co [1990] BCLC 263, which is referred to in paragraph (6) of the quotation from Keary v Tarmac. In that case an action had been financed by another company which was a creditor of the Plaintiff but the judge did not think on the evidence that that company could be relied upon to provide further assistance to the Plaintiff.

Advocate Sinel, drew my attention to the following two sections of the quotation from Keary v Tarmac, which read as follows:-

"The court will not be prevented from ordering security simply on the ground that it would deter the plaintiff from pursuing its claim."

"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".

In my view, there is a very clear distinction between the situation in which an Order is made for security for costs which cannot be complied with by the Plaintiff Company thus leading to the action being stifled, on the one hand, and the situation in which the making of an Order puts a party, who would without that Order be willing to continue to run the action because he was not at risk in relation to the other party’s costs because an Order for costs in favour of the Defendant would be unenforceable, into a position in which he no longer considers it worthwhile to run the action because he is at risk for the costs of the Defendant. My view is that the position of Mr Jolyon Baker in relation to this matter falls very clearly into the deterred category and not into the oppressed/stifled category. There is a very clear difference between the beneficial owner of a company who is personally financing and running an action in the name of that company, on the one hand, and a creditor, as in the Trident Case, on the other hand. If the position were not as I have set out above, then it would always be open to the beneficial owner of a company to avoid having to provide security for costs by saying that if the company is ordered to provide the security sought then he will not proceed with the action. In my view, it is clearly unjust that the beneficial owner of a company be permitted to run the action in the name of his impecunious company without having to furnish security for costs in these circumstances, because that creates an "uneven playing field" as between the parties. The balancing which must take place in such cases is clearly set out in paragraph (3) of the quotation from Keary v Tarmac. The ultimate test is the test set out in paragraph (6) of Keary v Tarmac as to whether if security were to be ordered in a certain amount, the claim would probably be stifled. Both parties agreed that the use of the word probably in that Judgment and elsewhere did not signify anything more than on a balance of probabilities.

I come next to the amount of security being sought. Before the security for costs hearing in 1996, the Defendant had produced details of costs to date on a taxed costs basis in a sum of just over £5,000 and an estimate of future costs. The bill of costs presented to me on 22 February 1999, was either on a taxed costs basis or on a Factor A and Factor B basis. However, at the date of the hearing before me, the Royal Court had not yet passed any rules in order to change the costs system. Until such time as that occurs, it would be wrong for me to make an order for the provision for security for costs upon the proposed new basis. However, it is right for me when making an order for security for costs, to give to the defendant leave to apply for an increased sum once the new system has come into force. What was before me now was a further bill calculated on a taxed costs basis up to 31 December 1998,and a further estimate. The total of all of these comes to a figure of about £46,000. These total estimates were based upon a trial period of about 10 days.

I have decided to allow a trial period of about 8 days and to only allow a legal assistant's time for 4 of those days. I have also made other reductions in relation to time claimed both for an Advocate and for legal assistants. The total effect of this is to reduce the total amount of security, on an taxed costs basis, for the whole action from £46,000 to the sum of £38,500, from which must be deducted the sum of £7,500 which has already been provided. Thus, the sum of additional security which I am looking at is the sum of £31,000.

At the hearing, a considerable amount of time was spent in considering the means of Mr Jolyon Baker. Both parties agreed that the Plaintiff was substantially insolvent. It is interesting to compare the situation now with that which existed in November 1996. At that time, Mr Jolyon Baker had a property with an equity of at least £195,000, a bank overdraft of £27,602.79 and other loans to family members of £31,000. The affidavit evidence produced to me on 22 February 1999, showed that Mr Jolyon Baker was able to sell that property for considerably more than anyone had anticipated. At the time of the hearing in February 1999, he was the owner of 2 properties which, together, would conservatively be valued at £727,000 but there were mortgages totalling £460,000 on these. He did not currently have any overdraft but had an overdraft facility in the sum of £40,000. The family loans in the sum of £31,000 still existed.

In November 1996, he estimated that his earnings for the year ending 1 September 1996, would be about £23,700. The figures before me showed that his earnings for 1996 were £42,000, for 1997, which was a good year, £75,000 and for 1998 £40,000.

In relation to the £40,000 overdraft, Advocate Thompson suggested that by reason of the fluctuating earnings of Mr Baker and outstanding tax bills from previous years all this would be needed.

Clearly, Mr Baker's financial position has greatly improved since November, 1996. At that time, his net assets were worth at least £137,000. Now they are worth at least £243,000 (including the £7,500 provided by him to the company by way of security for costs). Then he had a bank overdraft of £27,600 and I was requiring him to provide another £7,500. Now he has no bank overdraft. In 1996 I was being told that his annual income would be of the order of £25,000 but now I can see that even in the worst year it has been in excess of £40,000. I note from the figures that the family has been able to buy a new car when it has suited them and has been able to obtain mortgages for two properties.

It is clear to me that Mr Jolyon Baker is well able to provide a substantial additional amount in cash by way of security for costs from his existing overdraft facility. Furthermore, it is clear to me that he is well able to personally guarantee the liabilities of the Plaintiff by way of provision of security for costs. I am not happy at the suggestion of Advocate Sinel that such a personal guarantee be by way of charge on the 2 properties currently owned by Mr Jolyon Baker, as I believe that that will probably cause substantial difficulties in relation to the existing loans and as substantial legal costs will be incurred in relation to such a charge. However, I am satisfied that the claim will not probably be stifled and that it will not be oppressive for me to order that the company provides security for costs, partly in cash and partly by way of a guarantee from Mr Baker in the total additional sum of £31,000. The final question which I have to consider is as to how much of that should be provided in cash by means of the overdraft and how much by way of a form of undertaking and obligation in a similar form to those which have previously been provided by way of bank guarantee to the Judicial Greffier. I have come to the conclusion that £15,000 should be provided in cash and £16,000 by way of undertaking and obligation and this in a form to be approved by me. I will need to be addressed in relation to the time periods for this and in relation to the costs of and incidental to the application before me.

Authorities

Royal Court Rules 1992, as amended: Rule 4/1

Davest Investments Ltd -v- Bryant (1982)JLR 213

R H Edwards Decorators & Painters Ltd -v- Tretol Paint

Systems Ltd (1985-1986)JLR 64

R Heseltine, T J Heseltine & Offco Ltd -v- R J Egglishaw, Jehan, P J Egglishaw & Watkins (1989) JLR 1

Parkwood Ltd -v-Midland Bank Plc (1 August 1989) Jersey Unreported

Stephen Farrer -v- National Westminster Bank Finance (CI) Ltd (20 October 1994) Jersey Unreported

Pacific Investments Ltd -v- Christensen (13 September 1995) Jersey Unreported.

Mayo -v- Cantrade (31 May 1996)Jersey Unreported

English Authorities

R.S.C. (1999 Edition): 0.23

4 Halsbury 37: paragraphs 298-309

In Re Pretoria Pietersburg Railway Co (No 2) (1904)2CH D359

Aeronave SPA and another -v- Westland Charters Ltd and Others (1971) 3 All ER 531

Sir Lindsay Parkinson & Co Ltd -v- Triplan Ltd (1973) 2 All ER 273

Procon GB Ltd -v- Provincial Building Co and others (1984) 2 All ER 368

Porzelack K G -v- Porzelack (UK) Ltd (1987) 1 All ER 1074

Aquila Design (GRP Products) Ltd -v- Cornhill Insurance Plc BCLC 134

Trident International Freight Services Ltd -v- Manchester Ship Canal Co. and another (1990) BCLC 263

Innovare Displays Plc -v- Corporate Broking Services Ltd BCC 174.

Keary Developments Ltd -v- Tarmac Construction Ltd (1995) 3 All ER 534