Scottish Court of Session Decisions

[1] The pursuers are a corporation incorporated under the laws of Italy. They commenced the present action in the latter part of 1997. On 14 January 1999, while this action was still in dependence, the Tribunal for the area including the pursuers' seat made, on the application of creditors of the pursuers, an order relative to the pursuers in terms of Royal Decree No.267 of 16 March 1942. Judge Panichi was appointed as Giudice Delegato to the pursuers and Mr Verdecchia was appointed as their Curatore. The prefix " Fallimento" indicates the state of insolvent judicial administration to which the pursuers are presently subject.

[2] In this action the pursuers sue the defenders for payment under and for damages for alleged breach of a Distribution Agreement between the parties dated 24 January 1997. After sundry procedure but prior to the Tribunal's order of 14 January 1999, the agents and counsel originally acting for the pursuers withdrew. Ultimately new agents and counsel were instructed. On 9 November 1999 I refused a motion by the pursuers to sist the action for arbitration. Subsequently parties proposed that a proof before answer be allowed, though there were some differences between them on the scope of such proof. At that stage the defenders intimated that they intended to enrol a motion that the pursuers be ordained to find security for expenses. It being apparent that, if such a motion were to be granted, the pursuers might not be in a position to proceed with this action, a decision on any proof to be allowed was deferred until the disposal of the intended motion.

[3] Such a motion was duly enrolled and I heard counsel on it. Mr Sellar for the defenders moved me to ordain the pursuers to find caution for expenses in the sum of £50,000, though making it plain that the defenders were prepared to entertain any alternative form of security in a like amount. The application was made at common law, it being acknowledged that section 726 of the Companies Act 1985 applied only to a company incorporated in Great Britain. While the exercise of the court's common law power was ultimately a matter of discretion, the general rule was that an undischarged bankrupt would be ordained to find caution (Hegard v Hegard 1981 S.L.T (N) 45; Stevenson v Midlothian District Council 1983 S.C. (H.L.) 50). As regards corporate bodies, the effect of a winding-up order was to transfer the management of its affairs to a liquidator (Ayerst v C & K (Constuction) Ltd [1976] A.C. 167 per Lord Diplock at pp.176-7, cited by Lord President Emslie in Smith v Lord Advocate 1978 S.C. 259 at pp 268 - 70). A requirement for security from a British company in liquidation would ordinarily be avoided only because the liquidator was personally liable (Dyer v Craiglaw Developments Ltd 1999 S.L.T. 1228). A British company in insolvent receivership would ordinarily be expected to find security for expenses. The principle was that it was unfair that a defender should be exposed to the prospect, if successful, of being unable to recover his expenses from a body corporate in a state of formal insolvency. That principle applied in the present case where the pursuers were not merely impecunious but had entered into a state of formal insolvent administration. A Northern Irish company (to which section 726 of the Companies Act 1985 did not apply) would, if in insolvent administration, be ordered under English common law to find security (DSQ Property Co Ltd v Lotus Cars Ltd [1987] BCLC 60). A like result was appropriate at common law in Scotland. It had been ascertained that the Curatore would not under Italian law be personally liable in expenses. The best the defenders could hope for was that expenses awarded in their favour might be treated as an expense of the insolvency; but even this was uncertain. On the other hand, the defenders accepted that, having regard to the legal position in Italy, there was no practical mode by which the pursuers, if ordained to find caution, could comply with that order. Although the defenders had in their possession certain football boots, delivered by the pursuers but not paid for by the defenders, these did not constitute security for expenses since their value was significantly less than the damages for breach of contract which the defenders maintained they were entitled to set against the relative purchase price. It was also a relevant consideration, when weighing the respective prospects of success, that the boots supplied by the pursuers had failed two different testing procedures as to quality. On the material available, it could not properly be said that the defenders had been responsible for causing the pursuers' insolvent state. Cases such as Gallagher v The Corporation of Edinburgh 1929 S.L.T. 356 were accordingly distinguishable. As to Community law, an order for security would not constitute discrimination, direct or indirect, against the pursuers on grounds of nationality since a British company in an equivalent position would be subject to a like order. The relevant principles were to be found in Chequepoint S.A.R.L. v McClelland [1997] Q.B. 51. There was no obligation under Community law to treat a foreign company more favourably than a native one. Reference was also made to Dieter Rossmeier v Mounthooly Transport 2000 S.L.T. 208 and Nguyen v Searchnet Associates Ltd 1999 S.C.L.R. 1075. Havin

[4] Mr Sandison for the pursuers submitted that, on a sound application of Community law principles, the court had no power to require the pursuers to find security for expenses. Logically, no question of domestic law arose but, even if it did, it would be inappropriate for the court to exercise any discretion available to it thereunder to the effect of requiring security. At common law the principle upon which a bankrupt was in general required to find security was because on his sequestration he had been divested of his estate (Ritchie v McIntosh (1881) 8R 747, per Lord Young at p.748). There had been no such divestiture here. In any event, the mere existence of bankruptcy or its equivalent was not in itself sufficient to warrant an order for security for expenses. In Stevenson v Midlothian District Council there had been a number of additional factors, including the circumstance that the pursuer was regarded as having a case entirely without merit. No such circumstance applied to the present case. While it was accepted that an order for security could at common law be made against a British corporate body (Balfour Beatty Ltd v Brinmoor Ltd 1997 S.L.T. 888), such an order would be inappropriate in the present case. Hegard v Hegard did not assist the defenders. The fundamental consideration was what was in the interests of justice. It could not be just to preclude a corporate body from vindicating its maintainable claims in circumstances where the laws of the country in which it was incorporated rendered unconstitutional a requirement to give security for costs. Although the boots supplied had failed certain tests, the pursuers did not accept that these tests were valid to establish disconformity to contract. The pursuers' claims, of which more than £250,000 was for the price of goods supplied and not paid for, amounted to some £565,000. It would not be unreasonable to infer, even without detailed vouching, that the defenders' actions had precipitated the pursuers' insolvency. Gallagher v The Corporation of Edinburgh was accordingly in point. In any event, the boots held by the defenders provided more than adequate security for any expenses to which they might become entitled. Even on the defenders' own assessment the value of the boots exceeded the sum sought by way of security; on the pursuers' assessment the boots were worth more than twice that amount. The defenders were illegitimately retaining those goods against their claim for damages (Padgett v McNair (1852) 15D 76; Lupton & Co v Schulze & Co (1900) 2F 1118).

[5] In any event, Mr Sandison submitted, whatever the position under domestic law, Community law precluded the court requiring security for expenses from the pursuers. Such an order would infringe, directly or indirectly, the prohibition against discrimination on grounds of nationality laid down in what was now Article 12 of the Treaty of Rome (as amended). The direct effect of that Article had been clearly explained in the submission made by counsel for the pursuer and accepted by the Sheriff Principal in Nguyen v Serchnet Associates Limited at pp.1079-80. The current approach of the Court of Justice to Article 12 was to be found in a trio of cases - Data Delecta v MSL Dynamics Ltd [1996] ECR I -4661, Hayes v Kronenberger GmbH [1997] ECR I -1711 and Saldanha v Hiross Holding AG [1997] ECR I -5325 - in each of which it had been held that a requirement that a foreign national find security for legal costs amounted to direct discrimination. "Perfect" or "absolute" or "complete" equality of treatment was required by Article 12. Here there was direct discrimination because it was far from clear that an order for security would be made against a UK company. So far as had been discovered, only in one Scottish case, Balfour Beatty Ltd v Brinmoor Ltd (unreported on this point), had an order for security been made at common law against a UK company; in that case the ground of judgement was not related to any impecuniosity but to the fact that the company in question had been incorporated as a cat's-paw. The incapacity of the pursuers to find security was a function of their status as a creature of the law of Italy where a requirement to find security for costs had been declared unconstitutional (as noted by Advocate General Darmon in Hubbard v Hamburger [1993] ECR I -3777 at p. 3786). In any event the proposed order would constitute indirect discrimination. The decision of the Court of Appeal in Chequepoint S.A.R.L. v McClelland (which had proceeded on the basis of indirect discrimination) had predated the trio of Court of Justice decisions referred to. It had proceeded on the line of European authority illustrated by Sotgiu v Deutsche Bundespost [1974] E.C.R. 153, Boussac Saint-Frères S.A. v Gerstenmeir [1980] E.C.R. 3427 and Mund & Fester v Hatrex Internationaal Transport [1994] ECR I-467. Chequepoint S.A.R.L. v McClelland required to be approached with caution having regard the subsequent European developments. In any event, there was no suggestion in Chequepoint that there was any constitutional or other legal bar to the plaintiff in that case finding security for costs. To require an Italian company precluded by the laws governing its constitution from finding security for costs, and thus in effect to deny it the possibility of pursuing its claims in a Scottish court, would amount to a clear case of indirect discrimination on grounds of nationality. Moreover, in circumstances where a question of indirect discrimination arose it was necessary to consider whether the requirement was objectively justified. To cut a party off from pursuing its reasonable and substantial claims would be a quite disproportionate measure against any protection to be afforded to a defender against incurring irrecoverable expenses. As the pursuers could not lawfully find security in any amount, no submission was made as to the amount of caution sought. It might, however, be noted that it was not suggested that the future expenses which might be incurred by the defenders in this action would amount to anything as large as the sum sought by way of caution.

[6] It is convenient first to address the position under domestic law. Since the enactment of section 69 of the Joint Stock Companies Act 1856 (which applied throughout the then United Kingdom of Great Britain and Ireland) statutory provision has been in force under which a court in Scotland may in certain circumstances order a limited company which is a pursuer in an action or other legal proceedings to find caution for the defender's expenses. The current provision is section 726(2) of the Companies Act 1985. That provision (and its predecessors) does not (and did not) apply to a limited company incorporated abroad. (The relative statutory provision initially applied not only to Scotland and England but also to the whole of Ireland. But since the 1920's the British Companies Acts have not applied to either part of Ireland, Northern Ireland having its own separate provisions). The existence of such statutory provision has resulted in applications for the finding of caution by a pursuer which is a limited company ordinarily being made under the statute. It is not, however, disputed that, subject to any Community law rule, the courts in Scotland also have a common law jurisdiction to order a party which is a limited company to find caution for expenses. It was so held (in the case of a limited company which was a defender) by Lord Abernethy in Balfour Beatty Ltd v Brinmoor Ltd. It is not disputed that a like jurisdiction exists in respect of a limited company which is a pursuer.

[7] The courts in Scotland have long exercised a common law jurisdiction in respect of the finding of security for expenses by litigants who are individuals (Ritchie v McIntosh; Stevenson v Midlothian District Council). It would, however, be inappropriate, in my view, to seek to apply without qualification the principles applicable to an individual to the circumstances of a limited company. As Millett J. said in DSQ Property Co Ltd v Lotus Cars Ltd at p. 64e-f -

These observations were made in the context of an application under R.S.C. Ord 23 (which has no force in Scotland); but I agree with them and regard them as equally relevant to the exercise in Scotland of the court's common law jurisdiction in respect of limited companies. Likewise, the basis on which bankrupt individuals are ordinarily required to find caution (as laid down in Ritchie v McIntosh), namely, their being divested of their estates, has limited, if any, application, in my view, to the position of limited companies.

[8] There is, so far as I am aware, no reported case in which a court in Scotland has considered an application at common law to require a limited company to which the Companies Acts provisions do not apply to find security for expenses. There is accordingly no direct guidance. However, the jurisdiction involves discretion in the exercise of which a number of factors will fall to be considered. These will include, but are not limited to, the financial circumstances of the company.

[9] Where there is already available to a defender adequate funds or other resources out of which it can recover any award of expenses ultimately made in its favour, the court will clearly not make an order for caution or for further caution. In the present case the pursuers rely on the circumstance that the defenders retain in their possession goods supplied by the pursuers and unpaid for by the defenders, such goods having on any view a substantial total value - on the defenders' assessment about £65,000, on the pursuers' about twice that figure. There is prima facie force in Mr Sandison's contention that, having regard to Padgett v MacNair and Lupton & Co v Schulze & Co, the basis on which the defenders claim to be entitled to retain those goods is unsound in law; Mr Sellar did not seriously challenge the proposition that these authorities still had effect, albeit subject to the qualification that a party retaining unpaid for goods against a claim for damages did not thereby lose his right to reject them (Pollock & Co v Macrae 1922 S.C. (H.L.)192, per Lord Dunedin at page 201). If such goods cannot lawfully be retained against a claim for damages, it is difficult to see that, having been so retained, their value could lawfully be set off against such a claim on it ultimately being established; in any event, no authority to that effect was cited to me. Moreover, the defenders in the present action present no counterclaim, being content to restrict their claims to set off, if necessary, against the unpaid purchase price. On the other hand, it cannot be said to be clear that the defenders would be unable, in the event of a decree for expenses being granted in their favour, to set off, so far as necessary, against any claim by the pursuers for the return of goods held to have been validly rejected (the defenders' contention in respect of these goods) their then liquid claim for expenses, being a claim untainted by any illegality. The balancing of such claims in circumstances where the pursuers are insolvent seems broadly consistent with the Scots rule of the balancing of accounts in bankruptcy. Accordingly, although it cannot be said definitively that the goods will, in the event of the defenders being successful and being awarded expenses, be available to set off against the award of expenses but not otherwise, there is at least a fair prospect that that will be so. Although I would not have regarded this factor on its own as sufficient to refuse the motion for caution, it is, in my view, a consideration to be taken into account with others in the exercise of the relevant discretion.

[10] It is difficult on the information available to reach any firm conclusion as to whether or not the defenders' refusal to pay for goods supplied to them (or to accept and pay for goods ordered by them) was instrumental in bringing about the condition of insolvency of the pursuers which now exists. The sums at stake are, however, not inconsiderable and it would be unsurprising if they were of some significance in that regard. Some, albeit limited, weight falls, in my view, to be accorded to this factor.

[11] I also take into account, albeit on a broad and wholly provisional basis, the prospects of success of each party. It can certainly be said that, as regards tests carried out on the quality of the boots, certain of these, including tests conducted on the instructions of the pursuers, have tended to show serious defects in their quality. But the appropriateness of these tests for the contractual purpose has been put in issue and it cannot be said (as it was in Stevenson v Midlothian District Council) that the pursuers' claim is entirely without merit.

[12] One aspect of the matter has given me particular trouble. The pursuers being a corporate body with, as I understand it, limited liability will have creditors, shareholders or others having an interest in the prosecution of this action. I raised with Mr Sandison whether it might not be appropriate to know whether, and if so to what extent, such interested parties might be able or willing to provide security. Mr Sandison's position was that the court ought not to have regard to any possibility that persons behind the pursuers might be in a position to do so. Mr Sellar did not press me to pursue this matter. In these circumstances, albeit with some misgiving (since in general this is a matter on which, in my view, the court should be fully informed by the insolvent company), I do not take in the present circumstances that unexplored possibility into account.

[13] The position thus remains that on the information before me the pursuers are, by reason of the rules of law applicable to their place of constitution, unable themselves to find caution in any amount and there are no others to whose ability or willingness to find security regard may be had. If the pursuers are ordered to find security for expenses, they will be unable to proceed further with this action. If, on the other hand, no such order is made and the pursuers are ultimately unsuccessful, the defenders may obtain an award of expenses which is unsatisfiable or largely unsatisfiable. It is to be noted, however, in this regard that, although the defenders seek security in the sum of £50,000, that sum is intended to cover, at least in substantial part, expenses already incurred (estimated by them at approximately £45,000). Their estimate of the expenses, on a party and party scale, likely to be incurred by a proof, if allowed, is approximately £23,350. On the assumption that judicial expenses will prove to be irrecoverable from the pursuers, the majority of those will be irrecoverable however this motion is disposed of. Only future expenses would be saved if the motion were granted.

[14] Having weighed all the factors referred to I have come to the view that on balance it is appropriate, having regard to the interests of justice and as a matter of domestic law, that the motion for caution be refused. While the defenders will undoubtedly be disadvantaged by requiring to continue the defence of this action at the instance of an insolvent company, the effective stifling of claims which cannot be said to be plainly invalid would not in all the circumstances, in my view, be justified.

[15] In these circumstances it is unnecessary to decide the issue of Community law. It would accordingly be inappropriate to enter upon a detailed discussion of it. I observe only that, despite the attractive presentation of the argument, I would not have been disposed to hold that my discretion to make an order for security was in the circumstances excluded or restricted by Community law rules concerning direct or indirect discrimination on grounds of nationality.

[16] However, for the reasons given earlier, I exercise my discretion by refusing the motion. The case will now be put out By Order to discuss further procedure.