Debt - reasons relating to an application for security for costs by the plaintiffs.
Before : |
Advocate M. J. Thompson, Master of the Royal Court |
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Between |
Daniel Young |
First Plaintiff |
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Simon Jonathan Young |
Second Plaintiff |
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Michael Christopher Goulborn (practising under the name and style of Bois Bois, a firm) |
Third plaintiff |
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And |
John Keith Haden MBE |
First Defendant |
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Incat Equatorial Guinea Limited |
Second Defendant |
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Incat Equipment Rental Limited |
Third Defendant |
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Incat Technical Services Limited |
Fourth Defendant |
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Integrated Petroleum Services Gabon Limited |
Fifth Defendant |
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Advocate A. D. Hoy for the Plaintiffs.
Advocate R. A. Leeuwenburg for the Defendants.
CONTENTS OF THE JUDGMENT
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Paras |
1. |
Introduction |
1 |
2. |
Background |
2-12 |
3. |
Issues |
13 |
4. |
The parties' contentions |
14-16 |
5. |
Decision |
17-18 |
6. |
Security for costs of a counterclaim |
19-21 |
7. |
The position of the first defendant |
22-31 |
8. |
The position of the defendant companies |
32-48 |
9. |
Conclusions |
49 |
judgment
the master:
1. This judgment represents my decision in relation to an application for security for costs by the plaintiffs as defendants to the counterclaim.
2. These proceedings arise out of a claim for unpaid fees by the plaintiffs between 2007 and 2010 in the sum of £367,536.74 plus accrued interest at a rate of 1% per month until payment. The proceedings were commenced by an order of justice issued on 20th October, 2014.
3. An answer and counterclaim was filed by the defendants on 21st November, 2014. In the answer and counterclaim the first defendant raises specific defences that he did not personally agree to retain the plaintiffs and did not agree to bear responsibility for the plaintiffs' fees. All defendants also challenge the quantum of the fees. The defendants finally deny liability on the basis of a counterclaim by reason of alleged negligence and/or alleged breaches of duty by the plaintiffs. On the face of the pleading the counterclaim is advanced by all the defendants including the first defendant and damages in the sum of $8 million are claimed.
4. The background underlying the plaintiffs' claim for unpaid fees and the counterclaim is a transaction and subsequent dispute between Incat Group including the second to fifth defendants ("the defendant companies") and Luba Freeport Limited ("Luba") as described at paragraphs 2 to 12 of the judgment of the Royal Court given by Commissioner Clyde-Smith Incat v Luba [2008] JRC 140 dated 21st August, 2008,. I adopt these paragraphs for the purposes of this judgment.
5. The specific complaints of the defendants are set out at paragraphs 40-48 of the answer and counterclaim as follows:-
Breaches of duty by the Plaintiffs and loss suffered as a consequence
"40. The Plaintiffs acted in breach of the duties set out above at paragraph 40 above in the following ways and the Incat Group (and/or the First Defendant if (which is denied) the First Defendant personally engaged the services of the Plaintiffs) suffered the loss set out below.
41. The Plaintiffs failed to protect the interests of the Incat Group by failing to insist on, and to secure, the incorporation into the Share Sale Agreement and/or the Side Letter of a provision obliging Luba to repay the Debt within a fixed period of time in the event that bank financing was not achieved by a specified date.
42. Had the Plaintiffs acted in accordance with its duty and secured such provisions then the Incat Group:
42.1. Could have enforced the totality of the Debt.
42.2. Would not have incurred its own legal costs of the 2006 Proceedings and/or would not have become liable for Luba's adverse costs of £562,000.
42.3. Would not have been obliged to compromise the totality of its claim as it did.
43. Further, the Plaintiffs acted in breach of duty and/or were negligent in advising the Incat Group to commence and/or prosecute the 2006 Proceedings (or in failing to advise the Incat Group not to commence and prosecute those proceedings) in circumstances where (as is clear from the judgment in the 2006 Proceedings) the 2006 Proceedings had no real prospect of showing that any sum was at that time due under the Debt and the Plaintiffs ought to have known that.
44. By reason of the Plaintiffs' said breach of duty and/or negligence, the Plaintiffs caused the Incat Group to incur the legal costs of the 2006 Proceedings and to become liable for Luba's adverse costs thereof.
45. In seeking the stay of the Costs Order, the Plaintiffs were in breach of duty and/or negligent in that the Plaintiffs failed to represent the Incat Group's interests properly and/or adequately, thereby exposing the Incat Group to the enforcement of the Costs Order before Luba's liability to pay the Debt had been established.
46. Further, the Plaintiffs were in breach of duty and/or negligent in that they failed to advise the Incat Group to assert a set off of the Costs Order against the amount of the Incat Debt which vastly exceeded the amount of the Costs Order.
47. As a consequence of the Plaintiffs' said breaches of duty and/or negligence, the Incat Group was faced with the threat of imminent enforcement of the Costs Order which would inevitably have led to its insolvency. The Incat Group was, accordingly, obliged to enter into the Luba Settlement Agreement on terms that were manifestly and seriously disadvantageous to it. But for the situation caused by the Plaintiff's said breaches of duty and/or negligence, the Incat Group would not have entered into the Luba Settlement Agreement.
48. In the premises, the Incat Group has lost the full value of the Debt and incurred unnecessary wasted costs."
6. In the reply to counterclaim, the plaintiffs in summary allege firstly that Luba or Lonrho would not have agreed to change the terms of the Side Letter. Paragraph 23 of the reply therefore pleads as follows:-
"23. As to paragraphs 21 and 22 the Plaintiffs have no knowledge as to who drafted the Side Letter, which reflected the terms of the discussion set out above. The draft Side Letter was received from Mr Haden by fax on or about 26 April 2006 who was staying at the Royal Garden Hotel in London. On 27 April 2006 the Second Plaintiff sent a fax to Mr Haden marked *URGENT* at 20:38 stating "As discussed I am not happy that this document provides the adequate security for a large debt!" Discussion at the telephone was thereafter had between Mr Haden and the Second Plaintiff on or about 28 April 2006 and the Second Plaintiff noted at 09:43 -"SY [the Second Plaintiff] speaking with JH [Mr Haden] - Happy with draft of SY. Happy with $5 million or $4.5 million." The Second Plaintiff's draft of the Side Letter was sent to DLA Piper and provided a back stop date of 31 October 2006 (as to 75% of the debt) and 31 October 2011 for the balance as to payment of the debt allegedly due to the Companies or some of them. The Second Plaintiff had discussed the terms of the draft with Emma Priestley of Lonrho on or about 28 April 2006 who had advised the Second Plaintiff of the letter signed by Mr Haden dated 18 April 2006 (as pleaded at paragraph 22 above) and stated that Lonrho were simply not prepared to change the terms of the letter, it was take it or leave it. The Second Plaintiff wrote to Mr Haden by letter dated 5 May 2006 and faxed to him whilst he was staying in a hotel in Singapore, on his way to Melbourne: "With respect to the side letter, as we have discussed at the telephone, there is no possibility of negotiating any better deal with respect of the same. In the circumstances, if you are happy with the contents of the side letter, please sign and return by fax to ..."[12]. . These facts were found as facts by the Commissioner at paragraphs 19 to 29 of the case reported at [2008] JRC 140 and the Defendants are consequently estopped from advancing any other case. Save as aforesaid paragraphs 21 and 22 are denied."
7. The plaintiffs further allege that the decision whether or not to sign the Side Letter was a commercial one and it was the first defendant who agreed the terms of the Side Letter having received advice that its terms did not provide adequate security.
8. In relation to the conduct of the proceedings paragraph 39(2) and (3) of the reply states as follows:-
"39. Paragraph 39 is denied. In particular:
(2) in relation to paragraph 39.2 the Plaintiffs repeat paragraph 27. above. The Plaintiffs instructed Grahame Aldous of Counsel on 8 February 2007 with respect to the matter who advised that the Royal Court might determine that the implied term argument was a poor cause of action, that a reasonable period for Luba to seek bank financing could likely be any period of time and that the better causes of action were as suggested by him as included in the Re-Amended Particulars of Claim. Mr Haden agreed the amendments should be made and instructed the Plaintiffs to continue. The alternative claims were advised by highly regarded Counsel against whom any direct action by the Defendants is now prescribed. In the circumstances this allegation is without merit;
(3) as to paragraph 39.3 the plaintiffs repeat paragraph 34 above. The defendants admit they had no money and were thus unable to prosecute the 2009 action or make any further applications. Mr Haden was advised that the best way of trying to halt matters was to put up security for the costs and to commit to prosecuting the 2009 action. None of the Defendants were able to commit to either course of action."
9. In respect of the allegation that the plaintiffs' conduct meant that the defendants were compelled to settle with Luba on unfavourable terms, the defendants aver that the compromise was due to the inability of the Incat Group to put up security for costs due to Luba and/or fees to prosecute a claim for the debt as well as the Incat Group previously refusing to settle with Luba on terms contrary to the recommendations of the second and third plaintiffs.
10. On 7th April, 2015, directions were given for discovery followed by a stay for mediation. In fact mediation did not take place until November 2015 and regrettably was unsuccessful.
11. The plaintiffs' application for security for costs was issued on 29th February, 2016. It was not issued earlier as I was told that the plaintiffs wanted to try to resolve the dispute first before seeking security for costs. In this case therefore I do not consider there has been any unnecessary delay in the plaintiffs making the application. The application was supported by an affidavit of Mr Dexter Flynn an experienced English Solicitor employed by Voisin Law, Advocates for the plaintiffs. Mr Flynn's affidavit exhibited certain accounts of the defendant companies between 2008 and 2010, and also contained a schedule of the costs incurred by the plaintiffs up to the date of the application and an estimate of future costs.
12. The first defendant filed an affidavit on behalf of all the defendants in opposition to the applications for security for costs sworn on 28th March, 2016. The affidavit is material to the application and I therefore set out paragraphs 5 to 12 of Mr Haden's affidavit in full as follows:-
"5. I am personally resident, and own immovable property, in Jersey. I intend to raise the same arguments personally in defence of the Plaintiffs' claim as I intend to procure the Second to Fifth Defendants raise both in their defence of the Plaintiffs' claim and in prosecution of the Second to Fifth Defendants' counterclaim. The facts underpinning those arguments are fully set out in the Answer and Counterclaim in these proceedings dated 21 November 2014. The arguments will be heard, whether in the context of the claim or the counterclaim. I do not understand what additional costs could arise in respect of the counterclaim above those which would arise in the claim.
6. Each of the Second to Fifth Defendants is a company incorporated in Jersey (the "Companies"). Each of the Companies trades from Jersey at the address given above (see exhibit JKH4). None of the Companies is a shell. In other words, the Companies occupy real office space, employ staff, and operate bank accounts in Jersey. While each of the Companies has assets outside the jurisdiction of this Court, the Companies are each unequivocally within the jurisdiction for the purposes of enforcement or otherwise.
7. Because these are dynamic trading companies, not static holding companies, they have cash flow. That cash flow is relatively limited at the present time, due to the circumstances set out in the counterclaim, which had and continues to have a significant commercial disadvantage on the Incat Group as a whole and the Companies in particular. Nonetheless, the Companies have cash flow and the Viscount would be capable of enforcing costs against cash in Jersey.
8. Furthermore, the Companies have significant assets in, inter alia, Equatorial Guinea. While I concede that access to, and the realising of value of, those assets is not as simple as access to cash in a Jersey bank account, there need not be any concern about enforcing against them.
9. Neither I, nor the Companies - which are within my stewardship - seek to avoid our liabilities. I have always had a generally good relationship with the Second Plaintiff, and that continues to this day. If I or the Companies are ultimately found to owe the Plaintiffs some money, whether in respect of the substance of the claim or the costs associated therewith, I shall endeavour to satisfy those liabilities.
10. In any event, the Viscount can compel the Companies to realise value and discharge any adverse costs order by reason of the Companies' location within the jurisdiction of this Court. Were she required to take steps in, for example, Equatorial Guinea, she would require an undertaking from the Plaintiffs as to her costs of doing so. These can be the only costs additional to the Plaintiffs' natural costs of prosecuting the claim. However, the assets of the Companies in, for example, Equatorial Guinea, are sufficient to satisfy any adverse costs order against the Defendants, and the whole of the sum claimed by the Plaintiffs in their claim, as well as the Viscount's costs of enforcing the costs order outside the jurisdiction. Thus, the Plaintiffs would recover the Viscount's costs of enforcing overseas and would not therefore be required to perform the undertaking they would have given.
11. The Companies trade in a relatively small global market. Bad publicity, especially as to the honouring of liabilities, would be fatal to the business of each of the Companies. The Companies would not therefore take any steps to avoid or evade an adverse costs order.
12. An order requiring the Companies to provide security for costs in anything other than a nominal sum would, unequivocally, stifle the counterclaim and prevent the defence of the claim. The Companies do not have enough cash flow or liquid capital to satisfy such an order and continue trading. They Companies would choose to continue trading and thus these proceedings would have to be compromised on oppressive terms. Ironically, this is very similar to the circumstances which the Plaintiffs caused by their negligence as set out in the counterclaim."
13. In respect of the plaintiffs' application for security for costs, the issues it is necessary for me to determine are as follows:-
(i) To what extent can security for costs be ordered in respect of a counterclaim;
(ii) What is the effect of the first defendant being a Jersey resident on the application for security for costs against the defendant companies;
(iii) Would an order for security for costs probably stifle the counterclaim in view of the financial position of the defendant companies?
14. Advocate Hoy for the plaintiffs contended as follows:-
(i) The Incat Group is insolvent on a balance sheet basis as far as can be understood from the accounts of the defendant companies that have been provided;
(ii) The Incat Group might be insolvent on a cash flow basis and could be trading while insolvent;
(iii) There is no evidence by reference to Mr Haden's affidavit that there are any assets in his own name which could be used to meet an order for costs;
(iv) The counterclaim is much more than a defence. It is a substantive claim in its own right, which vastly exceeds the plaintiffs' claim for fees;
(v) The position is no different from the position in an unreported judgment, Jubilee Scaffolding Limited v Mark Amy Limited 1993/167, which I drew to the parties' attention. The relevant extract starts on page 3 of the decision as follows:-
"However, in England there has been a more recent Judgment in the Court of Appeal concerning this very point, namely Hutchinson Telephone (UK) Limited -v- Ultimate Response Limited [1993] BCLC 307. This case was decided on 10th August, 1992 but has not been mentioned in the 1993 White Book nor in any of the supplements thereto to date. In this case the previous cases were reviewed.
I am going to quote a number of sections from that Judgment as follows:-
(a) From page 310, commencing just below g -
"In the Supreme Court practice 1991, 23/1-3/8, at the foot of p 415, it is said against the rubric 'Counterclaiming defendant resident abroad':
'The mere making of a counterclaim does not put the defendant in the position of plaintiff under r 1(3); the question is whether, in the particular case, the counterclaim is a cross-action or operates as a defence."
(b) From page 311 beginning at section e where there is a quotation from the case of Neck -v- Taylor [1893] 1 QB 560 at page 562 as follows:-
"Where, however, the counterclaim is not in respect of a wholly distinct matter, but arises in respect of the same matter or transaction upon which the claim is founded, the court will not merely because the party counterclaiming is resident out of the jurisdiction, order security for costs; it will in that case consider whether the counterclaim is not in substance put forward as a defence to the claim, whatever form in point of strict law and of pleading it may take, and, if so, what under all the circumstances will be just and fair as between the parties; and will act accordingly,"
(c) From the top of page 313 as follows:-
"The question is whether in the particular case the counterclaim is a cross-action or operates as a defence, that is to say merely operates as a defence."
(d) From page 314 below g as follows -
"Incidentally asking for damages arising out of the same transaction is a different matter to putting forward a substantive cross-claim which will stand on its own and goes beyond being a mere defence, which has lost the essentially defensive character of a mere defence. If one is considering whether the counterclaim is indeed a mere defence or a cross-claim in its own right which might well stand and be proceeded with even though the original claim was abandoned, the marked discrepancy in size between the amount claimed in the action and the very much greater amount claimed by the cross-claim must be, in my judgment, a relevant factor.
One has therefore to look at the nature of the counterclaim and I therefore turn to the."
(vi) If the counterclaim failed an order for costs would not be made against the first defendant because he had no counterclaim. The loss alleged to be suffered is that of the defendant companies not that of the first defendant.
(vii) The application was made promptly once mediation had failed. The defendants should not be refused security in these circumstances.
(viii) The plaintiff's defence to the counterclaim was a strong case on the merits because Commissioner Clyde- Smith found in Incat v Luba [2008] JRC 140 that Luba or Lonrho would not have accepted an express time limit for the payment of the debt due to the Incat Group. The Royal Court judgment at paragraph 29 stated:-
"These amendments were not accepted by Lonrho and Mr Lenigas and Miss Priestley gave evidence that there was no way in which they would have agreed to the insertion of any terms which would have had the effect of setting a definitive time frame for the provision of bank debt financing for payment of the Incat debt. Those amendments were therefore removed from the draft."
(ix) To the extent that Mr Haden is funding the litigation including the counterclaim brought by the second to fifth defendants, I should ignore the possibility that a third party costs order might be made against the first defendant.
(x) The affidavit of the first defendant does not give any information either about his own position or about the position of the defendant companies and raises more questions than it answers.
15. Advocate Hoy fairly accepted that the first defendant had raised a specific defence that he was not personally liable and that all the defendants that challenged the reasonableness of the fees claimed. In respect of these defences he accepted that security for costs could not be claimed and a one third deduction in respect of his schedule of costs was not inappropriate.
16. Advocate Leeuwenburg in response contended as follows:-
(i) While the first defendant, a Jersey resident did not own any immovable property in his own name, he owns immovable property in Jersey through a company. However the first defendant's instructions were that there is insufficient equity in that property to meet the amount of costs claimed.
(ii) In producing the latest available accounts for each of the defendants companies, these companies are still in poor financial health and therefore an order for security in the amount sought would probably stifle the counterclaim. By reference to what is set out in the first defendant's affidavit an order for security would leave the defendant companies with the choice of either ceasing trading or withdrawing the counterclaim.
(iii) The position the defendants finds themselves in was due to the negligent advice of the plaintiffs.
(iv) Impecuniosity of itself is not a basis to justify an order for security.
(v) The defence and counterclaim of the defendants stand or fall together. The position is not therefore the same as in Jubilee.
(vi) The defendant companies are not empty shells and the first defendant was not in the same position as the individual plaintiff in Home Farm Developments v Le Sueur [2014] JRC 131.
(vii) All the defendants are in Jersey and the defendant companies are all trading.
(viii) To the extent I felt I did not have sufficient information I should allow the defendant companies more time to provide additional information.
(ix) In any event sufficient information has been provided unlike in the case of Orange Capital (Proprietary) Limited and Ors v Standard Bank Jersey Limited [2013] JRC 221A where no information was provided by the plaintiff companies against whom security was sought. The information provided was sufficient for me to be satisfied that the counterclaim would probably be stifled if the security requested was ordered.
(x) There are bank accounts in Jersey and other assets overseas against which a costs order in favour of the plaintiffs can be enforced.
(xi) My duty was to find a balance between injustice to the defendants if prevented from pursing a genuine counterclaim and on the other hand injustice to the plaintiffs if no security was ordered and the plaintiffs were unable to recover the costs of resisting the counterclaim successfully.
(xii) If I was minded to award security then any security should be ordered should be limited to the costs of enforcement because costs would otherwise be incurred in defending the claim in any event.
17. Where security for costs are sought against companies, the starting point in respect of an application for security for costs is paragraph 42 of the judgment of Commissioner Clyde-Smith in Café de Lecq v Rossborough (Insurance Brokers) Limited [2011] JLR 31 which provides as follows:-
"42 ...... Our conclusions are as follows:
(i) There is no presumption or principle that Jersey-resident corporate plaintiffs are not required to provide security for costs or that security for costs orders will only be made against Jersey-resident corporate plaintiffs in exceptional circumstances.
(ii) The principles to be applied when considering an application for security for costs against a corporate plaintiff are those set out in A.E. Smith (9).
(iii) The court is concerned with the effect of such an order upon the corporate plaintiff, not upon its directors, beneficial owners or other backers.
(iv) The possibility that the successful defendant may be able to apply for a costs order against a third party in the event that the assets of the unsuccessful corporate plaintiff are insufficient to meet its costs should not be taken into account."
18. This is the approach I have adopted in this case.
19. Where security for costs is sought in respect of a counterclaim, I agree the approach to be taken is that set out in Jubilee Scaffolding and the extract cited at paragraph 14(e) above.
20. In my judgment there is no distinction between the conclusion reached by Judicial Greffier Le Marquand in the Jubilee Scaffolding case and the present counterclaim. The counterclaim is a counterclaim that goes beyond being mainly a defence and has lost the essentially defensive character of any defence. The counterclaim, if the plaintiffs' claim for fees were withdrawn could stand alone and proceed to trial without adjudication on the claim for unpaid fees. There is also a marked discrepancy between the amount of fees claimed (although not small) and the amount of the counterclaim which is very much greater. I am therefore satisfied that security for costs can be ordered in respect of a counterclaim in principle and this is the type of counterclaim which justifies security for costs being ordered. Whether I should do so depends on the answer to the remaining two questions I have identified.
21. I also do not accept Advocate Leeuwenburg's contention that the only security I should require if I were to order security are the costs of enforcement. This contention does not reflect the reality of the counterclaim and is inconsistent with the approach set out in the Jubilee Scaffolding case.
22. I now turn to consider the effect of the position of the first defendant as a Jersey resident and whether this prevents security for costs being ordered against the second to fifth defendants in respect of the counterclaim.
23. I considered this issue in the Home Farm case and at paragraphs 25 to 27 of that decision I stated as follows:-
25. The view I have reached that is that the presence of an individual co-plaintiff within the jurisdiction is a factor that I am entitled to take into account in deciding whether or not to order security for costs. The well-known factors set out in L'Eau des Iles v A E Smith & Son Limited [1999] JLR 319 include the court having a complete discretion whether or not to order security at all. The court may also order security of any amount and need not order substantial security. The court has to balance injustice to the plaintiff company by ordering security against injustice to the defendant if no security is ordered. The presence of a resident individual co-plaintiff is weighed in the balance along with the other matters the court may take into account.
26. Without in any way limiting the discretion vested in the court, particular factors of the resident plaintiff that are likely to be looked at are the individual's financial position, whether he or she owns real property and its location, the nature of the relationship between the resident individual and the companies, the nature of the claims brought by the resident plaintiff and what assurances may have been given about meeting costs orders.
27. I therefore do not agree that the mere fact that the co-plaintiff is resident in Jersey is of itself sufficient not to require corporate plaintiffs to provide security. Rather it is a factor that should be taken into account in deciding whether or not to order security as a matter of discretion. In some case it will be a powerful and even a conclusive factor; in others it will not."
24. Applying the above approach, in respect of the first defendant, firstly I was informed at the hearing that he owned immoveable property through a company and not in his own name contrary to the impression given by the first sentence of paragraph 5 of his affidavit. I was also informed at the hearing that there is insufficient equity to meet the order for security sought by the plaintiffs. What I was not told was the value of the property or the amount of any indebtedness secured against it or owed by the company as legal owner of the property. I was also not told anything else about the first defendant's financial position in terms of his earnings or any other assets in his name or to which he is legally or beneficially entitled or where he has some form of interest or any debts he may owe. Yet it is clear from the first defendant's affidavit that he understood the applicable principles on a security for costs application, or had been advised about them. I have therefore concluded that the lack of information provided by the first defendant about his financial position was a conscious decision on his part despite being aware of the sort of information that was likely to be required.
25. In respect of his relationship with the defendant companies, as set out in the answer and counterclaim it appears that the first defendant is in some manner beneficial owner of or ultimately interested in some unspecified way in 75% of the shares of the defendant companies. I have reached this view by reference to paragraph 2 of the answer and counterclaim. However, the first defendant in his affidavit does not address his interest in the companies other than to say they are "within his stewardship". What he does not do is choose to set out the precise structure of the Incat Group or his interest in it and how his interest is currently held.
26. The assurance he gives in respect of any costs orders made against the defendant companies if the counterclaim fails is also vague. He simply states "I shall endeavour to satisfy those liabilities". That is very far from an assurance that either personally or through the defendant companies he will ensure that any adverse costs order is met.
27. In his affidavit while he states that the counterclaim is that of the second to fifth defendants this is contrary to paragraph 13 of the answer and counterclaim which states as follows:-
"13. To the extent that the Defendants (or any of them) have any liability to the Plaintiffs, that liability is extinguished by reason of negligence and/or breach of duty of Plaintiffs as set out in the Counterclaim herein which prevent any liability arising in respect of the services in question. Further, or alternatively, the Defendants (and each of them) are entitled to set off any of the sums due in respect of the Counterclaim against any sums otherwise due to the Plaintiffs in diminution or extinction thereof." (Emphasis Added)
28. While Advocate Leeuwenburg accepted that no loss had been suffered by the first defendant in respect of the counterclaim, the same factual matters are relied upon by the first defendant to extinguish or set off any liability for fees claimed by the plaintiffs. In my view therefore the first defendant is running the same arguments as the other defendants in respect of the third part of his defence and is asserting the same allegations of breach of duty as the other defendants to argue that any liability for fees is extinguished because if properly advised then certain fees would not have been incurred in the first place. What the other defendants also argue which the first defendant cannot is that fees found to be due can be set off against any loss if a breach of duty is established. The breach of duty in both cases advanced is however the same.
29. What this means is that in my view, based on the answer and counterclaim as presently pleaded, if the allegations of negligence made by the defendants fail, then I consider it is more likely than not an adverse costs order will be made against the first defendant as well as against the other defendants. This is because the first defendant at present is relying on the same matters to deny liability for fees. This view does not mean that the first defendant may not have arguments to contend that a costs order should not be made against him which is a matter for the trial judge. However, in deciding whether or not to order security for costs, I must take into account that, as matters stand, it is more likely than not that an adverse costs order will be made against the first defendant if the allegations of negligence made at trial are not accepted or proved. This is a factor in the defendant companies' favour.
30. However the first defendant does not appear to accept that costs orders may be made against him if the answer and counterclaim fail which is why in his affidavit he appears to distance himself from the pleaded counterclaim and argues that the counterclaim is that of the defendant companies only him. The affidavit fails to address his reliance on the same allegations of negligence by way of defence. The first defendant also has not indicated that he would voluntarily meet any costs orders made against the defendant companies. His affidavit simply states that if he or the companies are ultimately found to owe the plaintiffs money, he would endeavour to satisfy those liabilities. As set out at paragraph 26 above I am not satisfied any significant weight can be attached to such an assurance. The view I have reached therefore in respect of the first defendant is that his presence as an individual within the jurisdiction does not prevent me from ordering security for costs against the defendant companies, if otherwise I am satisfied it is appropriate to do so in this case.
31. I have reached this view because, while the position of the first defendant is not as extreme as that of the third plaintiff in the Home Farm case (see paragraph 28 of the Home Farm decision), the first defendant has no real property in his own name, has only provided through his advocate oral information about that property, the information provided about the real property owned through a company is limited and no other financial information is provided as set out at paragraphs 24 and 25 above. This lack of information is a conscious decision on his part. He has not indicated that he will meet any costs ordered to be paid by the second to fifth defendants, but only that he would endeavour to pay them without stating how that might be achieved. In exercise of the discretion vested in me I am not therefore persuaded that I should exercise my discretion not to require the second to fifth defendants to provide security for costs merely because of the first defendant's presence in Jersey.
32. In deciding whether or not to require the defendant companies to provide security for costs, as set out at paragraph 42(ii) of the Café de Lecq case, the principles to be applied are those set out in A.E. Smith & Son v L'Eau des Isles (Jersey) Limited [1999] JLR 319; those principles were themselves recited at paragraph 13 of Café de Lecq as follows:-
"13 It is helpful to set out in full the relevant part of the judgment of Southwell, J.A. in the Court of Appeal (1999 JLR at 322-323):
"The principles of law relevant in considering whether an order for security for costs should be made by the courts of England and Wales were well-summarized by Peter Gibson, L.J. in Keary Devs. Ltd. v. Tarmac Constr. Ltd.-‰.-‰.-‰. ([1995] 3 All E.R. at 539-542). For the purposes of the present application I am content to treat that statement of principles as generally suitable for adoption in Jersey law, while reserving for future consideration some of the details of this statement which may need some reconsideration in the different circumstances in Jersey. That statement is too long to be quoted fully here, and I summarize the principles as follows:
(a) The court has a complete discretion whether to order security.
(b) 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.
(c) The court must balance, on the one hand, the injustice to the plaintiff company if prevented from pursuing a genuine claim by an order for security, and, on the other hand, the injustice to the defendant if no security is ordered, the plaintiff's claim fails and the defendant is unable to recover its costs from the plaintiff. So the court will seek not to allow the power to order security to be used oppressively by stifling a genuine claim by an indigent company against a more prosperous company, particularly when the circumstances underlying the claim and/or the failure to meet the claim may have been the cause or a material cause of the plaintiff company being indigent. The court will also seek not to be so reluctant to order security that the impecunious plaintiff company can be enabled to use its inability to pay costs as a means of putting unfair pressure on the more prosperous defendant company.
(d) The court will broadly take into account the prospects of success in the action, and the conduct of the action so far. I mention here that it is common ground that the present application is to be decided without dealing with the merits of the cases put forward by either of the parties to the action.
(e) The court has a discretion to order security of any amount, and need not order substantial security.
(f) If the plaintiff company alleges that the effect of an order for security would be unfairly to stifle its genuine claim, the court must be satisfied that, in all the circumstances, the claim probably would be stifled. The test is one of probability, not possibility.
(g) The stage of the action at which security is sought is one aspect of the conduct of the action which the court will take into account.
In summarizing the principles, I have referred in principle (b) to a party being 'deterred' from pursuing its claim and in principles (c) and (f) to a claim being 'stifled.' It seems to me to be important to appreciate that there is a range of effects which an order for security may have on a plaintiff, extending from, at one end, possible deterrence, through probable deterrence, possible stifling, probable stifling to inevitable stifling at the other end of the range. There are shades of grey, not black and white, dividing 'deterrence' from 'stifling.'"
33. In applying these principles I start by reference to the position of the second to fifth defendants. I agree with Advocate Hoy that the defendant companies when looking at the 2008 and 2010 accounts exhibited to the affidavit of Mr Flynn, or the 2014 accounts are balance sheet insolvent. The overall position of the Incat Group is not explained at all even though each of the second to fifth defendants are a 100% owned subsidiary of Incat Holdings Limited as pleaded at paragraph 21 of the answer. The accounts provided are also complex in that there are numerous intercompany loans the effect of which is neither analysed nor explained by the first defendant and cannot be followed from the accounts provided.
34. By reference to the accounts provided, the defendant companies may also be cash flow insolvent but I do not have enough information from the defendants to conclude that this is definitely the position; despite losses being made the defendant companies have somehow managed to trade since the matters that first gave rise to the litigation between Incat and Luba, which form the background to the present proceedings and which the defendants blame for their present financial difficulties. What is clear is that the financial position of the defendant companies insofar as it has been revealed is unhealthy.
35. Furthermore the information provided is lacking in detail. There is no information as to what assets are within the jurisdiction, how much is held in bank accounts and where those bank accounts are located. Rather the first defendant only describes at paragraph 7 of his affidavit the cash flow as being limited. The affidavit does not provide any detail to explain these remarks other than to suggest the Viscount could enforce costs orders against cash in Jersey. This statement is also made without any detail about how much cash there is in Jersey or where it might be located.
36. The only information provided about assets outside the jurisdiction is to suggest that there may be assets in Equatorial Guinea. Although the first defendant, at paragraph 8 of his affidavit, suggests there need not be any concern about enforcing against such assets, he does not identify what assets there are in Equatorial Guinea, or indeed anywhere else, what he considers their value to be or how realisable they might be. If the plaintiffs were successful in their claim and the defence or counterclaim failed, the likely method of enforcement would be either placing the defendant companies' en désastre or into some form of compulsory liquidation or winding up. Whether the Viscount was acting or a liquidator was appointed, I consider it realistic to assume that it would not be straightforward for either to have their appointment recognised or to seize and liquidate assets outside Jersey. As the first defendant himself recognises at paragraph 11 of his affidavit, the defendant companies trade in a relatively small global market and bad publicity would be fatal to the business of each of the companies. A sale of any assets following any désastre or liquidation would therefore likely to be of interest to only a few buyers, if at all, and probably at a significant discount compared to their value if the defendant companies' businesses were sold as a going concern.
37. The position I am left with therefore is that the defendants have only provided limited financial information. In the Orange Capital case at paragraph 23 when considering this issue when no accounts had been provided I stated as follows:-
"23. Just as in Goldtron, no published accounts have been produced, nothing is known about the financial position of the plaintiffs and the plaintiffs have not adduced any evidence to show that they are willing or able to meet any adverse costs order. All I was told was that if security were ordered the plaintiffs would pay the relevant amount into Court. I was not given an explanation about the nature of the plaintiffs' businesses beyond what is contained in the order of justice; I have not been shown any balance sheet or other accounts, or any evidence showing the nature, location or substance of their assets."
38. While I have been provided with more information by the defendants than the plaintiffs in Orange Capital case chose to provide, the position is not much more advanced. I do not have the overall financial position of the Incat Group. Evidence has not been adduced to show that the defendants are able to meet any adverse costs order. I have simply received the benefit of a vague statement that the defendants will endeavour to pay any costs order without any information to show that they could do so. The arguments advanced implying that it would be straightforward for the Viscount or a liquidator to enforce any costs order against the defendants are far from convincing. Finally I have not been given any evidence showing the nature, location or substance of the assets of the second to fifth defendants.
39. The view I have reached therefore is that the financial position of the defendant companies is such that, without security for costs being ordered, the plaintiffs would at least face significant difficulty in enforcing any costs order and at worst would find themselves facing defendants who were insolvent on any basis and who either were placed en désastre or in liquidation. Subject to the question of stifling, this position justifies security for costs being ordered.
40. In expressing this view I accept that the plaintiffs already face a risk that they may not be able to recover any fees awarded in their favour. However, the acceptance of that risk does not mean that the plaintiffs are not entitled to seek security for costs in respect of the counterclaim. Merely because the plaintiffs may face difficulties in enforcing a judgment in their favour, does not mean that the plaintiffs must accept the additional risk of not being able to enforce a cost order in their favour in response to an unsuccessful allegation of professional negligence.
41. In respect of the invitation that I should allow the second to fifth defendants more time, I return to my findings that it is clear that the first defendant under whose 'stewardship' the defendant companies operate, has been advised about the principles of a security for costs application. In my view therefore the decision not to provide any further information beyond that produced was one that was deliberate. The first defendant from his affidavit clearly understands the applicable test and must be taken to be aware of the level of detail required in respect of the defendant companies against whom security is sought. As the person with 'stewardship' of the defendant companies, and with the required understanding of what is required, he has chosen not to provide that information. I do not therefore consider it appropriate to allow more time to do so.
42. Whether I should order security for costs against the defendant companies where their position is not healthy requires me also to address the statements of the first defendant that the counterclaim would probably be stifled if security for costs were ordered in the amount sought.
43. In evaluating an assertion of stifling and weighing it in the balance, as I am required to do by the A.E Smith & Son case, the final paragraph of the extract of A.E. Smith & Son cited above notes the importance of appreciating that there is a range of effects which an order for security for costs may have "extending from, at one end, possible deterrence, through probable deterrence, possible stifling, probable stifling, to inevitable stifling at the other end of the range." There are shades of grey, not black and white dividing 'deterrence' from 'stifling'."
44. In my view, in view of the financial position of the defendant companies as it has been explained, ordering security would probably deter if not possibly stifle the counterclaim in this action. The defendant companies may not be far from being unable to pay their debts as they fall due. Their financial position as best I can understand is unhealthy. However, despite this, I am not satisfied that the claim would probably be stifled. This is because of the lack of information provided by the first defendant either about his own financial position, whether in Jersey or the financial position of the Incat Group as a whole and what assets each of the defendant companies may have in Jersey or elsewhere and their value. The Incat Group has managed to continue for a number of years notwithstanding the apparent financial difficulties its accounts appear to reveal and has some cash flow albeit unspecified. The income of the fifth defendant by reference to the latest accounts also runs into seven figures (in £ sterling). In reaching this view, I have also taken into account the fact that, it is not appropriate to order the full amount of the security sought as Advocate Hoy conceded and that in assessing quantum some discount should be applied for amounts irrecoverable on taxation.
45. In relation to quantum the overall amount of security sought in round terms was £122,863. Reducing this sum by approximately one third to reflect the defences raised by the first defendant alone and in respect of all the defendants' challenge to quantum, leaves a figure of £80,000. Having considered the amounts already incurred and the amounts claimed, while I consider that some amounts will be disallowed on taxation, I do not regard the amounts claimed as manifestly excessive. I therefore consider that on a taxation, of the costs claimed, if they are incurred, around £60,000 would be recovered.
46. In deciding what security to order, I have also reminded myself of the words of the Court of Appeal in Leeds United v Association Football Club Limited, The Phone in Trading Post, t/a Admatch [2009] JLR 186 at paragraph 20 (cited in the Orange Capital decision at paragraph 15) and the fact that ordering security can have implications for cash flow which are likely to be significant. In this case, given what has been revealed about the financial position of the defendant companies, ordering security for costs of more than an nominal amount will in my view have implications for the cash flow of the defendant companies even though I am not satisfied that their claims will probably be stifled. I consider it is appropriate to take this into account in reaching a view as to what security should be ordered.
47. In my view the appropriate amount of security to be ordered taking all the information provided into account is £50,000 to balance injustice to the plaintiffs, if security is not ordered on the one hand, and injustice to the defendants on the other if too much security is requested, for all the reasons I have given. This is the amount of security I therefore order to be provided by the second to fifth defendants. This sum is less than half the amount requested by the plaintiffs and while it may not be easy for the defendants to raise this sum, the Incat Group does have some cash flow. The first defendant also does have some equity in the property he owns through a company; he has only stated that this equity was not enough to meet the sum sought. He did not say that the equity available might not be sufficient to meet or help meet a lesser sum.
48. In reaching my conclusion, I have not given any weight to the merits of the counterclaim and the contentions of Advocate Hoy that any counterclaim was contrary to the findings of Commissioner Clyde-Smith referred to at paragraph 14(h) above. This is because what is to be explored at trial is what discussions took place between the plaintiffs in particular Advocates Young and Goulborn on the one hand and the first defendant on the other, in relation to the allegations of negligence. In other words it remains to be considered what advice was given, what instructions were given (as well as by whom) and what risks were assumed in response to the advice given. The allegations made at paragraphs 40 to 48 of the answer and counterclaim involve allegations of negligent conduct and failing to advise even in respect of matters that were considered by the judgment of the Royal Court in 2008 in respect of the position of Lonrho. In my view therefore they are matters for trial and in ordering security I have reached my decision on the assumption in the defendants' favour that both the counterclaim and the defence to the counterclaim are arguable and I have not accepted that the plaintiffs in defending the counterclaim have strong prospects of success. I did not have enough information before me to reach such a conclusion.
49. For all the reasons set out in this judgment I therefore order the defendants to pay the plaintiffs security for costs in the sum of £50,000. When judgment is handed down I will hear argument on the time by which such security has to be provided as well as arguments on costs.
Authorities
Incat & Ors v Luba Freeport Limited [2008] JRC 140.
Jubilee Scaffolding Limited v Mark Amy Limited 1993/167.
Home Farm Developments v Le Sueur [2014] JRC 131.
Orange Capital (Proprietary) Limited and Ors v Standard Bank Jersey Limited [2013] JRC 221A.
Café de Lecq v Rossborough (Insurance Brokers) Limited [2011] JLR 31.
A.E. Smith & Son v L'Eau des Isles (Jersey) Limited [1999] JLR 319.
Leeds United v Association Football Club Limited, The Phone in Trading Post, t/a Admatch [2009] JLR 186.