K Ltd. v National Westminster Bank Plc & Anor

LORD JUSTICE WARD: This is an application by the respondent bank for security for the costs of its appeal. The application is brought on two grounds. The first is CPR 3.1(5) which enables the court to order security where without good reason a party has failed to comply with a rule, practice direction or relevant pre-action protocol. The complaints in that regard can be summarised as the inconvenience of managing litigation where different firms of solicitors are acting in parallel, and secondly a complaint about having been ambushed in the court below. As to the latter, it seems to me that is a matter that failed to be considered when the judge dealt with it and when he ordered costs in the respondent’s favour. There are ways of conducting litigation; that may not have been the best but it hardly, it seems to me, is of the kind that would justify an invocation of security under CPR 3.1.5, still less the difficulties in dealing with different solicitors. The jurisdiction is not made out under that ground in my judgment. That leaves security to be obtained under CPR 25.15, which points the Court of Appeal back to 25.13. Security can be ordered if the court is satisfied that it is just and if the ground relied upon here, namely that the appellant is a company and there is reason to believe it will be unable to pay the defendant’s costs if ordered to do so.

Let me deal with impecuniosity first. This is a small private company and the evidence of its financial status is demonstrated in the accounts which are before me and Mr Downes draws my attention to the accounts of year ending March 2004. Abbreviated accounts were filed at Companies House, as was permissible. We do have the full accounts of that year and looking at those accounts a number of points are taken by the applicant. They are that the fixed assets have visibly deteriorated from the previous year, that is correct, and that position was shown again from the abbreviated accounts of 2005 which the appellant has produced. Now, the tangible assets of this little company clearly do not include freehold property. They are assets which are depreciating year by year and so that point is made good.

If one looks at cash at the bank and in hand for 2003 there was some £28,000 in the bank. It had reduced to £8,000-odd in 2004 and in 2005 was further reduced to about £2,000, so there is evidence that the money in the bank is going down. Further evidence of that deteriorating position is shown in the liabilities which have increased year by year from £42,000 to £47,000, nearly £48,000, up to £57,000, and not surprisingly therefore the net asset position of the company shows an equal decline. That is not a happy picture to put before the court. I have no accounts for the year 2006.

Against that, Mr Berkley submits that there has been a change in the trading position of the company, which at one stage seems to have been involved in assisting in litigation relating to motor accident claims, and seems to have branched out into what is said to be a more lucrative business dealing in mobile telephones. There is, I think, possibly some modest support for that submission if one looks at the profit and loss account of the company for 2004.

It is, and I note against the appellant, the only profit and loss account. The full accounts were not disclosed to the court, and I draw an adverse inference against them from the fact that they were not, but the fact remains that turnover in 2003 was £416,000, it has gone down to £361,000 in 2004, and if one translates into the losses shown in 2005, it may be a fair inference that the turnover has gone down in that year as well.

Now the extraordinary fact is that the transaction with which the court is closely concerned in this appeal is a single transaction involving the sale and resale of mobile telephones, where the price is £200,000. That as a single item compared with the total turnover of £361,000 in 2004 gives some support to the submission that the business has changed. There is moreover, and starkly, and unexplained receipt from Customs and Excise of a VAT refund of some £672,000.

Now in turnover terms, Mr Downes calculates, I think, that that would equate to VAT on a turnover of £3.8 million, which seems quite staggering given the sort of figures which I have disclosed in the accounts before me. Whether that is, as suggested by Mr Allen, solicitor for the respondent, an indication as he says in his third witness statement, “It merely indicates that the company may now have a high turnover”, if it is evidence of a high turnover, it is a very significant change indeed. If it is, as it could be, evidence of some capital expenditure, it is still capital expenditure of a vast amount of money, which seems out of character with the previous trading history as it has been shown to me.

I am left therefore in some doubt as to what the true financial position of the company is, and although I have my suspicions about it, I am not fully satisfied that this company would be unable to pay the respondent’s costs if ordered to do so.

Even if I am wrong about that, I have a general discretion to exercise in deciding where the justice of the application lies. This appeal arises following permission given by the judge in the court below. That judgment was given in September of last year and it was known as at 9 September that this appeal would be launched. No application was made for security for costs in the respondent’s notice and no indication of security was foreseen until the request came in a letter early in January. There was no response to it, which was unfortunate, but not surprising given the deteriorating relationship between the parties. There was a further request in May and then the application was brought on 30 September.

So the application is in fact late. It is no fault of the respondent that it is only listed for hearing today. They bear no responsibility for that delay. That was caused by the court’s inability to fix this appointment.

What strikes me as unusual is that the relationship of appellant and respondent is that of the customer and bank, or rather former customer and former bank; and knowing, as the bank must, the details of their customer’s account it is noteworthy that no immediate application was made when this appeal was first launched, and I cannot but wonder the extent to which this escalating litigation, which in some ways is deplorable, does not result in a tit for tat response from the bank, but I am told that the decision to investigate security for costs was taken on counsel’s advice in January.

What strikes me as really important in this application is that the bank are a financial institution which is at great risk of prosecution if it does not report the proceeds of crime which it suspects and which it is duty bound to report. They were on the horns of a dilemma at the time this application was brought before the judge below. They had on the one hand their duty to act faithfully under their contract with their customer. They had on the other hand their conflicting duty under the Proceeds of Crime Act to report any possible money laundering or other proceeds of crime. They are truly on the horns of a dilemma.

It is obvious from this litigation that the freezing of the client’s account does cause havoc for the client and puts the bank in an invidious position. It does seem to me therefore that the bank does have an interest in this court adjudicating firmly on the ambit of the Proceeds of Crime Act so that banks and other financial institutions do know precisely where they stand.

If the appeal succeeds, the bank will be in difficulties. If the appeal fails, the bank is at prejudice of not recovering their costs of this appeal. But it seems to me, balancing the justice of this matter, it is important in the public interest that this appeal should be heard and heard soon and in the public interest a large financial institution such as this bank may have to bear the risk of having an unsatisfied order for costs.

In my view, although there is on the one hand a straightforward commercial battle between a claimant and a defendant, there is more involved in this litigation than that, for that reason I have allowed the intervention of the Customs and Excise and in my judgment it is important that this appeal be heard.

There is no question on the evidence that an order for costs would stifle the appeal; that notwithstanding, in my view the justice of the case demands that the application be refused, and I am afraid, Mr Downes, that is what is going to happen.