Chemistree Homecare Ltd & Ors v Roche Products Ltd

This is an application by the defendant (“Roche”) under CPR 25.13(2)(c) for security for costs on the basis that the claimants (collectively “Chemistree”) are companies and there is reason to believe they will be unable to pay Roche's costs if ordered to do so.

Roche now seeks, by way of a first tranche of security, 75 % of the costs it has already incurred and 75 % of the costs it will have incurred by 22 July 2011, including its costs of an interim injunction application which is due to be heard in a window from 18 to 20 July 2011. Its total costs estimate for this whole period is £747,200 and the sum of security sought is therefore £560,400 plus VAT.

Chemistree began trading in January 2009, having acquired the assets of two companies, InteCare Limited (“ICL”) and InteCare Homecare Limited (“ICHL”) from their administrators. It comprises three businesses, one conducted by each of the claimants.

The first claimant (“CHL”) acts as a dispensing pharmacy and a provider of delivery services to NHS Hospital Trusts through a service called Homecare. Its business includes the dispensing of pharmaceutical products which are delivered to patients in their homes. It has the particular attraction to hospitals that it is VAT exempt.

The second claimant (“Blackbay”) provides pharmacy services to the elderly in care homes. It currently operates through six depots nationwide.

The third claimant (“Zanrex”) operates ten retail pharmacies in Greater London and surrounding areas.

In this action, Chemistree allege that they began to trade with Roche in January 2009, but that from July 2010 Roche sought to impose conditions on its supply of pharmaceutical products which are excessive and disproportionate. They contend that this conduct constitutes a breach of Roche's statutory duty to supply approved medicines to pharmacies under Regulation 8(1)(b) of the Medicines for Human Use Regulations 2005 (the “2005 Regulations”) and an abuse of a dominant position, so infringing Article 102 TFEU or section 18 of the Competition Act 1998.

Chemistree issued the claim on 23 November 2010 and, on the same day, issued an application for interim injunctive relief. It was supported by a witness statement of Mr Samir Budhdeo, the moving spirit behind Chemistree, dated 22 November 2010, to which various management accounts are exhibited.

The application for the interim injunction first came before the Court on 29 November 2010, on which occasion the parties agreed interim terms of supply pending the full hearing. A listing application took place on 14 December 2010, at which Chemistree's representatives requested the full hearing should take place not before May 2011, with the result that it has been listed for hearing in July 2011.

The particulars of claim were served on 21 January 2011. Upon receiving them, the size and scope of the claim became apparent to Roche and its solicitors, Eversheds. It relates to 18 products and raises complex issues of law and fact, which they believe will require economic expert evidence to resolve. They therefore concluded Roche's costs of defending the claim were likely to be substantial.

Between 21 January 2011 and 8 March 2011, Eversheds carried out an investigation into Chemistree's financial affairs, as a result of which they formed the view that Chemistree's financial position appeared to be extremely poor. However, they considered it appropriate to give Chemistree an opportunity to address their concerns and, accordingly, set them out, together with details of the evidence supporting them, in a letter to Chemistree's solicitors, Axiom Stone, dated 8 March 2011.

No reply to that letter was received and so Eversheds wrote again on 24 March 2011 formally requesting security for costs of defending the claim up to and including the trial in the sum of £3,560,000 and fortification of the cross-undertaking offered by Chemistree in support of the interim injunction application. They also informed Axiom Stone that they considered it necessary to protect Roche from exposure to further costs that it might be unable to recover by ceasing work both on the interim injunction application and the substantive proceedings generally until adequate security had been provided.

By letter dated 23 March 2011, Axiom Stone replied to Eversheds, stating that they were taking their clients’ detailed instructions and would respond in due course. In the meantime, they suggested that the parties should avoid incurring further costs through the courts.

As a result of this suggestion, Eversheds wrote to Axiom Stone on 11 April 2011 requesting that the deadline for Roche to submit its evidence in answer to the interim injunction application be extended until after the question of security had been dealt with.

By letter dated 12 April 2011, Axiom Stone refused that request and also asserted that it appeared to them that the threat of an application for security for costs in such a large sum was an attempt to stifle Chemistree's genuine claim.

This assertion was repeated by Axiom Stone in a further letter dated 18 April 2011, but still without any substantive response to the concerns raised by Eversheds in their original letter of 8 March 2011. Accordingly, Roche issued this application for security for costs on 21 April 2011, supported by a witness statement of Mr Davenport, a partner in Eversheds, dated 20 April 2011.

The security application was originally listed for substantive hearing between 7 and 9 June 2011. However, on 2 June 2011, Chemistree, having still not served any evidence in response, issued an application seeking an adjournment of the hearing until after 31 August 2011, whilst still seeking to maintain the July hearing date for their interim injunction application.

The adjournment application was supported by a second witness statement of Mr Budhdeo, dated 1 June 2011, in which he stated:

“17.

I do not believe that the two hours currently listed will be sufficient. This is because Chemistree will not have sufficient free cash (not profit) without jeopardising patient care to meet any order for security for costs. Therefore, the judge at the security for costs hearing will need to consider Chemistree's overall prospects in the case and whether, as Roche suggests, the claim should be struck out. Accordingly, Lord Denning MR's guidance on these matters is relevant and the merits of the case will carry a disproportionate weighting for the presiding judge in deciding the outcome of this application. ”

The hearing of the adjournment application took place before Morgan J on 2 July 2011. He refused the application, but put the hearing of this security application back by one week to give Chemistree an opportunity to serve evidence in response. The judge observed at paragraph 8 of his judgment:

“8.

Before I deal with the procedural difficulties that have since arisen, I think I ought to make two comments on that application notice. Although the application notice seeks security up to and including the trial of this action, it may very well be that the judge hearing the security for costs application would not order security for the entirety of the period but would instead deal with the period until trial and the trial itself in bitesize stages. For example, the court may take the view that costs up to the end of the interim injunction application might be the subject of a security order and leave over what is to happen thereafter. Further, if the matter continues after the interim injunction application (and I assume that it will), then the court might decide to order security up to the end of the disclosure process or some other convenient demarcation point in the run-up to a trial. I am not going to bind the hands of the judge who hears the security for costs application, but what I have said I think is everyday experience of such applications.”

Then, at paragraph 15, he said:

“15.

Having looked at the witness statement of Mr Budhdeo, this does not begin to be a case where I could possibly accede to the relief which is sought in the application notice of adjourning this matter for a lengthy period, certainly not adjourning it to a date which is after the interim injunction application. It seems to me to be very important that this matter is dealt with soon and it is dealt with in good time before 18 July 2011. I say good time because if an order for security is made (and I make no prediction whatever about that) it is important that the question of security is resolved. Will it be provided? Will it not be provided? Time will be taken for that purpose and the defendant needs to know where it stands before it incurs substantial costs in dealing with the interim injunction application.”

So it is that the application comes before me and is limited at this stage to an application for security in respect of the costs already incurred and those which will be incurred to the end of the interim injunction application.

The principles I must apply in considering this application are well established. I must be satisfied as to two matters: first, there is reason to believe Chemistree will be unable to pay Roche's costs if ordered to do so; and second, having regard to all the circumstances, that is appropriate to make the order sought.

The first requirement was considered by the Court of Appeal in Jirehouse Capital v Beller [2008] EWCA Civ 908, [2009] 1 WLR 751. Arden LJ, with whom Moore-Bick and Mummery LLJ agreed, referred to the judgment of Sir Donald Nicholls V-C in In re Unisoft Group Ltd (No 2) [1993] BCLC 532 and then addressed the approach to be adopted to the evidence in these terms at paragraphs 23 to 24:

“23.

The relevant passage in the judgment of Sir Donald Nicholls V-C in the Unisoft case was, at p.534:

“Before me there was a dispute between the parties on the proper interpretation of section 726(1) and, in particular, of the effect of the words 'if it appears by credible testimony that there is reason to believe'. Mr Potts QC, for the respondents to the petition, submitted that the question is not whether the court is satisfied on the balance of probabilities that if the plaintiff loses it will definitely be unable to pay the costs of the defendants; the test is whether there is reason to believe, being a belief derived from credible evidence, that the company will be unable to pay if it loses. If there is such evidence, the threshold requirement is satisfied even though there may be contrary evidence from the plaintiff company.

I start consideration of the subsection by noting that the phrase 'the company will be unable to pay the defendant's costs if successful in his defence', is clear and unequivocal. The phrase is 'will be unable', not 'may be unable'. 'Inability to pay' in this context I take to mean inability to pay the costs as and when they fall due for payment. Thus the question is, will the company be able to meet the costs order at the time when the order is made and requires to be met? That is a question to be judged and answered as matters stand when the application is heard by the court, although the court will take into account and give appropriate weight to evidence about what is expected to happen in the interval before the costs order would fall to be met. The court will draw appropriate inferences and here, as elsewhere, it will not let common sense fly out of the window.

The phrase 'the company will be unable to pay' is preceded by the words 'if it appears by credible testimony that there is reason to believe'. I do not think this latter phrase has the effect of watering down the words which follow. The court, on the basis of credible testimony, must have 'reason to believe', that is, to accept, 'that the company will be unable to pay'. If this were not so, and the test is not whether the court, on the basis of credible testimony, believes the company will be unable to pay, then it is difficult to identify what is the proper approach and what is the test being prescribed by the statute. It cannot, surely, suffice that the applicant's accountant, for example, who is a credible witness, puts forward a case of inability to pay. If there is conflicting evidence the court must have regard to that also. The court must reach a conclusion on the basis of the totality of the evidence placed before it, giving such weight to the various matters deposed to as is appropriate in the circumstances. The matter on which, in the end, the court is required to reach a conclusion is whether the company will be unable to pay.”

24.

In my judgment, Mr Driscoll is correct in his submission that the Vice-Chancellor was primarily concerned with answering the submission by counsel that if there was evidence which could be described as credible testimony that the company would not be able to pay the costs if ordered to do so, the threshold requirement in s.726 was satisfied even though there might be contrary evidence from the company. The answer given by the Vice-Chancellor contains a number of points. First, as the Vice-Chancellor makes clear, the phrase "the company will be unable to pay" requires more than simply that there is doubt whether the company will pay. Otherwise the second limb would have to say “the company may be unable to pay the costs”. Secondly, the Vice-Chancellor holds that the court must have regard to conflicting evidence. The court must reach its conclusion as to whether the conditions in the statute are satisfied by reference to the totality of the evidence”.

Arden LJ then turned to the relevant hurdle and, at paragraphs 26 to 33, explained that there is a difference between a conclusion that there is reason to believe that a company will be unable to pay costs ordered against it and a conclusion that it has been proved that the company will not be able to pay costs ordered against it. In the former case, there is no reason to reach a final conclusion as to what will probably happen. In the latter case, a conclusion has to be reached on the balance of probabilities. The former case identifies the lower threshold which has to be met on an application for security for costs.

I must now apply these principles in the present case and consider first, whether, on the evidence as a whole, there is reason to believe that Chemistree would be unable to pay Roche's costs if ordered to do so.

In that regard, Roche now estimates its total costs of the action at about £5,019,000, but recognises that these could be reduced on a detailed assessment by as much as 25 %. However, as I have said, at this stage, and by way of a first tranche, it only seeks security for its costs down to the conclusion of the interim injunction application.

Roche's evidence on this issue is contained in the first witness statement of Mr Davenport, to which I have referred, and in the second witness statement of Mr Davenport, dated 14 June 2011. Mr Davenport exhibits to his first witness statement a first report of Mr Doug Hall, dated 21 April 2011, and to his second witness statement a second report of Mr Hall, dated 13 June 2011. Mr Hall is a Chartered Accountant and the Head of Forensic Services at Smith and Williamson Limited and he has examined Chemistree's accounts, such as they are.

Chemistree's evidence on this issue is contained principally in the first and second witness statement of Mr Budhdeo, to which I have referred, and in the third witness statement of Mr Budhdeo, dated 9 June 2011. Chemistree also rely upon a witness statement of Mr Christopher Butler, a costs draftsman, dated 9 June 2011. He comments upon the size of Roche's schedule of costs.

At the outset, Roche points to an apparent change in position by Chemistree. As I have mentioned, Mr Budhdeo stated at paragraph 17 of his second witness statement that Chemistree will not have sufficient free cash to meet any order for security for costs without jeopardising patient care. Moreover, Axiom Stone have stated in correspondence that Chemistree were concerned that the application for security for costs was an attempt by Roche to stifle their genuine claim. However, at this hearing, Chemistree have now contended that the three elements of their business are healthy and successful and there is no risk that they will not be trading in 2013, the likely trial date, at a level that would enable them to pay Roche's reasonable costs, were they to be ordered to do so.

In his first report, Mr Hall considered the financial information then available to him. This comprised annual accounts filed at Companies House to December 2009 and unaudited management accounts for the period from 1 January 2010 to 31 October 2010 for CHL and for the period 1 January 2010 to 31 July 2010 for Zanrex and Blackbay.

Focusing on the financial position of Chemistree, as disclosed in their filed accounts, he explained that, as of 31 December 2009:

Mr Hall also referred to Dun and Bradstreet credit reports on Chemistree obtained on 25 February 2011. These showed that each of the claimants had a credit rating of N4, the lowest possible rating short of a company being subject to an insolvency process.

Mr Budhdeo responded to this evidence in his third witness statement by providing an explanation of more recent trading activities of Chemistree and exhibiting draft management accounts for the period from 1 January 2010 to 31 December 2010 for CHL and for the period from 1 January 2010 to 31 October 2010 for Blackbay and Zanrex.

Based largely upon these draft management accounts, Mr Budhdeo has elaborated upon the financial position of each claimant. He says that CHL purchases all its pharmaceutical products without credit. It currently buys about £3 million worth of pharmaceutical products per month on terms which require it to pay on presentation of invoice. It made a pretax profit in 2010 of approximately £1.3 million on a turnover of £21,850,000 and it has a forecast turnover for 2011 of £31 million. Mr Budhdeo values the company at £10 million.

Blackbay also purchases its pharmaceutical products without credit. It currently buys about £700,000 of pharmaceutical products per month on like terms to CHL. It made a loss in the first ten months of 2010, much of which was attributable to depreciation, and it has a forecast turnover for 2011 of £21 million.

Zanrex, too, purchases all its pharmaceutical products without credit. It currently buys about £500,000 worth of pharmaceutical products per month on like terms to CHL. It made a profit in the first ten months of 2011, assisted by the sale of a pharmacy in Edgware for £625,000, and it has a forecast turnover for 2011 of £5.3 million. Mr Budhdeo values Blackbay and Zanrex together at £12 million.

Overall, Chemistree submit their various businesses are trading as going concerns and, in the case of CHL and Zanrex, profitably, and can be expected to meet an order for costs if that eventuality arises.

In the relatively short time available to him, Mr Hall has prepared his second report in which he has analysed these management accounts in some detail, but before referring to his conclusions I think it important that they be placed in context.

In his first report, Mr Hall noted that, in order to provide a more up to date and comprehensive review of the financial history and position of Chemistree and, therefore, an up to date opinion of their ability to pay Roche's costs, he would require, inter alia, Chemistree's full accounts for the year ended 31 December 2010, recent; unaudited management accounts for the four months ending 30 April 2011, including details of Chemistree's current cash and liquidity position; and information as to the availability of any financial support available to Chemistree to assist in meeting any liability to Roche for costs.

In the event, only limited disclosure has been produced by Chemistree, consisting of the unaudited management accounts to which I have referred, Dun and Bradstreet reports for each of the claimants, dated 2 June 2011, and Mr Budhdeo's witness statements. No management accounts have been provided for Blackbay or Zanrex since 31 October 2010 and none have been provided for CHL since 31 December 2010, and no explanation has been provided for that failure.

Mr Hall expresses considerable concern at this lack of information. As he says, up to date management accounts are a basic and essential management tool and, unless the Directors of Chemistree have lost control of the financial position of the claimant companies, it ought to have been possible to provide them.

As for CHL, Mr Hall accepts that the management accounts now provided show a pre-tax profit in the year to 31 December 2010 of approximately £1.3 million and an improvement in CHL's net current assets, a measure of its immediate solvency, to approximately £1.2 million as at 31 December 2010, compared to net current liabilities of approximately £225,000 as at 31 December 2009. He says it is apparent that the improvement in CHL's net current assets and solvency has been achieved by the pre-tax profit it has apparently achieved in 2010. However, CHL's annual turnover decreased in December 2010, as did its gross profit percentage. These two factors imply to him that the improvement in CHL's net current assets and solvency that has been achieved by the pre-tax profit it has apparently achieved in 2010 will not be sustained.

As for Blackbay, Mr Hall says that the management accounts show that the annual run rate for sales reduced from £12.2 million for the seven months to 31 July 2010 to £10.2 million for the three months to 31 October 2010. The gross profit percentage has fallen significantly over the period, falling from 43.2 % in 2008 to 34.7 % in 2009 to 23.4 % in the ten months to 31 October 2010. More recently, the three months to 31 October 2010 show a further decline in gross profit percentage to 20.8 %. Pre-tax profits were close to break even in 2008 and 2009 and for the seven months to 31 July 2010. However, in the three months to 31 October 2010, Blackbay reported a significant decrease in its profitability, reporting annual losses of approximately £1.2 million. These pre-tax losses appear to have been caused by a decline in sales and gross profit percentage. Net current liabilities have continued to deteriorate during the three months ended 31 October 2010, increasing by 21 % from approximately £1.1 million as at 31 July 2010 to approximately £1.3 million at 31 October 2010. Therefore, Blackbay's immediate solvency and its ability to pay its liabilities as they fall due have worsened. Net assets as at 31 July 2010 of £182,000 have become net liabilities of £124,000 at 31 October 2010. Similarly, Blackbay's tangible net liabilities as at 31 July 2010 of approximately £661,000 had increased to approximately £934,000 as at 31 October 2010.

Finally, as to Zanrex, the management accounts show an underlying annual pre-tax profit of approximately £179,000, equivalent to 2 % of turnover, that is to say close to break even; a significant decrease in Zanrex's gross profit percentage from 21 % for 2009 to 17.8 % in the ten months ended 31 October 2010; and that a further similar decline in gross profit in 2011 could mean a return to pre-tax losses for the company. Net current liabilities have remained at roughly the same level as in previous periods at approximately £1 million as at 31 October 2010. Therefore, there has been no improvement in the immediate solvency position of the company.

Mr Hall concludes that Blackbay and Zanrex were insolvent as at 31 October 2010. CHL had an improved net asset position based on possibly unreliable management accounts. However, those accounts also call into question whether that improvement will continue.

Consideration of Chemistree's combined balance sheet as of 31 October 2010 shows that they had net current liabilities of approximately £1.7 million and net liabilities of approximately £0.3 million. Deducting goodwill from net liabilities results in a tangible net liabilities figure of £2 million. Combined cash balances held by Chemistree as at 31 October 2010 were approximately £60,000 and, as of that date, there was a net balance due from Chemistree to other group companies of approximately £88,000. Based upon the combined financial position of Chemistree, Mr Hall concludes that, as of 31 October 2010, they were insolvent. He believes that Mr Budhdeo's forecasts for 2011 are unsubstantiated and unrealistic, as are his valuations for Chemistree's various businesses.

I should also mention the most recent Dun and Bradstreet reports dated 2 June 2011. These do show some improvement in the credit rating of CHL and Blackbay; each now has an N3 risk of business failure. This signifies a greater than average risk of business failure, though in a lower risk industry sector. Curiously, these ratings appear still to be based upon the 31 December 2009 accounts.

Seen against the background of a lack of up to date financial information for any of the claimants, I find Mr Hall's analysis thorough and cogent. I am persuaded that there is reason to believe that Chemistree will not be able to pay costs ordered against them.

I am confirmed in this view by the evidence given by Mr Budhdeo in his third witness statement. He explains that CHL is heavily dependent on its cashflow to pay for new pharmaceutical products. A provision of £4.3 million by way of security would be the equivalent of a reduction of £25 million in stock purchased and, in consequence, over £25 million in revenue. This, he says, would cause the business and the claim to be stifled.

That brings me to the second question, namely whether it is just to make an order and, if so, in what sum. Chemistree submit that depriving them of the sum sought would be highly detrimental to their ongoing growth and, as I say, would stifle the claim. In my judgment, there are two answers to this submission.

The first is that, today, Roche only seeks security for its costs of the action to the end of the injunction application in the sum of £544,700. Mr Budhdeo does not suggest that this is a sum which Chemistree would be unable to pay. As I have explained, his evidence is directed to the payment of Roche's costs of the whole action.

The second is that there is no evidence before me that Chemistree could not raise those funds from outside sources in any event. It is well established that a party who alleges that an order for security will stifle a claim must adduce satisfactory evidence not only that it does not have the means to provide the security, but also that it cannot obtain appropriate assistance from a third party. Here, there is no such evidence. Indeed, Mr Budhdeo explains in his third witness statement how Chemistree's business was founded with the assistance of his brother, Mr Sanjay Budhdeo, a property developer and investor, who bought the assets of ICL and ICHL and who owns Zanrex. These businesses were acquired in Blackbay and all the claimants were then rebranded as Chemistree.

Chemistree also contend the application has not been brought in a timely manner. I am unable to accept this submission. I have set out earlier in this judgment the history of the claim and I think it is clear that Roche made its request for security reasonably promptly after the service of the particulars of claim and has pursued it thereafter with reasonable diligence.

Roche contends I should also have regard to the weakness of Chemistree's claim. It says the claim is substantially the same as that brought by ICL against Pfizer in action HC10C00741. Just as in this case, ICL sought a mandatory injunction which was heard by Roth J on 12 March 2010. In his judgment dated 15 March 2010 ([2010] EWHC 600 (Ch)), Roth J refused the injunction sought, finding that ICL had fallen short of establishing a high degree of assurance it would succeed at trial.

Upon this application, Chemistree say that their claim is significantly different from that considered by Roth J in two respects. First, Chemistree allege that Roche is in breach of the 2005 Regulations when construed in light of the Medicines for Human Use (Prescribing by EEA Practitioners) Regulations 2008, in that the information conditions Roche seeks to impose will impede the supply of pharmaceutical products to patients in the UK and in the EU.

Second, the competition claim contains an EU free movement aspect, in that Chemistree contend Roche's alleged behaviour constitutes constructive refusal to supply and will have the consequence that Chemistree will lose their ability to maintain the pan-European supply of pharmaceutical products through their Euroscript service.

It is not possible for me to assess the merits of these claims on the limited material available to me upon this application. However, I would observe that neither of these further claims seems to me to be clearly spelt out in the particulars of claim as they currently stand.

Finally, I come to the amount of security. As I have mentioned, Roche seeks security in the sum of £560,400, being 75 % of its estimated total costs of about £747,200 to the end of the injunction application. It also estimates its cost of the whole action at in excess of £5 million. By contrast, Chemistree estimate their total costs of the action at about £1,325,000. There is plainly a great difference between them.

I appreciate this case raises complex legal and factual issues concerning a large number of products and that it is of considerable importance to Roche. Further, it is inevitably difficult at a stage such as this to form a clear view as to the amount of work that Roche must carry out properly to address the issues which arise. Nevertheless, it does seem to me that its costs estimates are extremely high, even for a case of this apparent complexity. Doing the best I can on the materials before me, I believe a fair and proportionate sum to award by way of security is 60 % of Roche's cost estimate, that is to say £450,000.