Concept Elite Inc v (Thames Enterprises Ltd & Ors

I have before me an application for security for costs by the first to seventh Respondents (whom I shall refer to as the Applicants) to be provided by the Petitioner. The underlying petition is an unfair prejudice petition under section 994 CA 2006 concerning the affairs of the eighth respondent (which I shall refer to as the Company). The Petition makes a large number of wide-ranging allegations covering a period of 25 years concerning a large number of individuals, companies and complex transactions and events which took place in a number of countries.

On 7 November 2011, Deputy Registrar Barnett ordered a meeting to identify and, if possible, narrow the issues in accordance with the guidance in Re Rotadata Ltd [2000] 1 BCLC 212. That led to a slight narrowing of issues. As set out in the Case Summary, the numerous allegations can be grouped together in the following broad headings:

The Company was formed in 1987 to carry out property investment, in particular to obtain a portfolio of investment properties from Prudential. There were originally four families involved in the investment. In February 2000, one family, the Kalidas Shah family, transferred its interest (or most of it) to two of the other families, the Mehta family and the Chandaria family. The fourth family is the Fulchand Shah family (which I shall refer to as the Shah family).

The shareholding in the Company is now as follows: the Petitioner holds 20%, the first Respondent (which is a company in which the Mehta family – which includes the second to fourth Respondents – is interested) holds 34.6%, the fifth Respondent (which is a company in which the Chandaria family – which includes the sixth and seventh – is interested) holds 40.4%. The remaining 5% is held by Grid Holdings Ltd (which is not a party to these proceedings). That company is owned by another family although I am not clear if that is the Kalidas Shah family. Nothing turns on this.

The Petitioner is a Liberian company. Apart from the fact that it is the vehicle through which the Shah family interests are held, there is nothing in the evidence before the Court about its legal or beneficial ownership, its assets of its liabilities save that it is known that it has the 20% share in the Company and a 20% share in a Guernsey company, Otley Riverside Holdings Ltd (which I shall refer to as Otley), about which I shall say more later.

Before coming to the facts, I shall mention the relevant law as to which there is not really any dispute. It is its application to the facts which is the area of dispute.

Under CPR 25.13(1), the Court may make an order for security for costs if (a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order and (b) one or more of the conditions in paragraph (2) applies. Reliance is placed on paragraphs (2)(a) and (c).

The court has a wide discretion under paragraph (1) whether or not to make an order. The test is whether it is just to make an order. It is not enough that the case falls within paragraph (2). This is trite law but since Mr Neville-Clarke, who appears for the Petitioner, spent a little time emphasising the point, I make it to indicate that I have it well in mind.

The Petitioner is, as I have said, a Liberian company. There is nothing to suggest that it is resident other than in Liberia, which is not a state within CPR 25.13(2)(a)(ii). The Court therefore has jurisdiction by reference to paragraph 2(a). Mr Potts (who appears for the Applicants) has referred me to the US State Department’s 2011 Investment Climate Statement which states that the court system in Liberia cannot be relied upon and there is no general bankruptcy law to protect creditors’ rights. It is evident, he submits, that it would not be possible to enforce a judgment against the Petitioner in Liberia. Mr Neville-Clarke did not suggest otherwise. I think that Mr Potts’ submission is likely to be correct.

I will consider whether paragraph (c) is also satisfied later. But at this stage, I mention Mr Potts’ submission that there is clearly every reason for the Court to conclude that the Petitioner will be unable to pay the Applicants’ costs. In that context he has referred me to the decision in President Mbasogo, The Republic of Equatorial Guinea v. Logo Limited & Ors [2006] EWCA Civ 608:

“None of the parties to these proceedings is resident in the United Kingdom. Whilst there is no doubt reason to believe that the first appellant, the President of the Republic of Equatorial Guinea, and the Republic itself, the second appellant, are of substantial means and good for any order for costs that might be made against them in these proceedings, that cannot be said about the companies and individuals comprising the respondents. Importantly, with the requirements of CRP 25(13)(2)(c) in mind, none of the respondents – notwithstanding the history of this matter and much rattle of accoutrements before the battle over the issues of costs and the need for security – has sought to put forward any information as to his or its means.

In my view, the observations of Mance LJ, as he then was, at paragraphs 11 and 13 of his judgment in Marine Blast Limited v Targe Towing Limited [2003] EWCA Civ 1940, and of Buxton LJ, at paragraph 6 in Phillips v Eversheds [2002] EWCA Civ 486, are relevant to the approach of the court in considering whether there is reason to believe that the party against whom security is sought will be unable to pay the other party's costs if and when ordered to do so. It is an approach that falls below the level of balance of probability, as Mance LJ pointed out. And, where it arises as a result of the party against whom the order is sought either providing unsatisfactory financial information as to his or its affairs, or as in this case none at all, it is not a big step for the court to take to conclude that there is reason for such belief. As Buxton LJ put it in paragraph 6 of his judgment in Phillips v Eversheds there is, at the very least, significant danger in this case of one or more of the respondents not being able to meet any order for costs made against them when the time comes.”

In Keary Developments Ltd v Tarmac Construction Ltd and another [1995] 2 BCLC 394, Peter Gibson LJ set out some relevant principles in the exercise of the Court’s discretion under section 726(1) Companies Act 1985. Those principles are equally applicable to the exercise of the discretion under CPR 25.13(2)(a) and (c). Keary was a case where the company was a plaintiff in conventional litigation by it against a defendant seeking payment of certain monies allegedly owing. The present case is a different sort of claim but I see no reason to think that the principles are any different.

The Judge dealt with these principles, starting at p 400 between f and g and continuing through to p 403 j. Much of what the Judge said related to a very important factor in the exercise of the discretion, namely the stifling of a claim which a company seeks to bring or the possibility that the company would be deterred from pursuing a claim by an order of security for costs. I do not need to go into any detail in relation to what he said because, in the present case, it is not submitted that the Petitioner’s claim would in any way be stifled, or that it would be deterred from proceeding further, if an order were made.

Nonetheless, I should mention the third principle (starting at the foot of p 400) which is that court has to carry out a balancing exercise. It must weigh the injustice to the claimant company if prevented from pursuing a proper claim against the injustice that the defendant might find himself unable to recover costs if successful. But the court will be concerned not to allow the power to order security for costs to be used as an instrument of oppression although it should not, either, be so reluctant to make an order that “it becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on the more prosperous company”. In the present case, there is nothing to suggest that the Petitioner will be deterred to further pursing its claim. Nonetheless, I must be careful to avoid using my power to order security for costs as an instrument of oppression.

I would also refer to another passage, commencing with the last paragraph on p 401, where the Judge said this

“However, the court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons. As this is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation (see Flender Werft AG v Aegean Maritime Ltd. [1990] 2 L1LR 27 ). ”

In that context, it is to be noted that not only has the Petitioner declined to provide any evidence about its own financial position, it has failed to adduce any evidence as to the means of those who stand behind it.

It is right, in all these circumstances, that I proceed on the basis, as I do, that an order for security for costs would not stifle the Petitioner’s claim or deter it from proceeding further with that claim.

The merits of the claimant’s claim are relevant. But the court is not to conduct a mini-trial. The fourth principle is put in this way at p 401 letter c:

“In considering all the circumstances, the court will have regard to the plaintiff company's prospects of success. But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure (Porzelack v Porzelack (UK) Ltd [1987] 1 WLR 420, 423 per Sir Nicolas Browne-Wilkinson V-C). In this context it is relevant to take account of the conduct of the litigation thus far, including any open offer or payment into court, indicative as it may be of the plaintiff's prospects of success. But the court will also be aware of the possibility that an offer or payment may be made in acknowledgment not so much of the prospects of success but of the nuisance value of a claim.”

Mr Potts has also referred me to the Admiralty and Commercial Court Guide where it is said:

“Investigation of the merits of the case on an application for security is strongly discouraged. It is usually only in those cases where it can be shown without detailed investigation of evidence or law that the claim is certain or almost certain to succeed or fail will the merits be taken into consideration.”

In the present case, there have been no open offers. There has been an unsuccessful mediation but I do not see that as affecting the position one way or the other.

Delay in making an application is also a factor. If the delay causes little or no prejudice to the person against whom security is sought, it clearly carries less weight in the balancing exercise than where the prejudice is significant. Moreover, inordinate and inexcusable delay may be conclusive against the making of an order. In the Commercial Court, the usual time for making an application is at the Case Management Conference: (see Appendix 16 to the Admiralty and Commercial Court Guide). Although there is no CMC as such in section 994 Petitions, an appropriate time for making an application might be thought to be when a directions hearing is held following filing of a defence.

The Petitioner’s grounds for resisting the applications are based on three factors: delay, the merits of the claim and the assets available in the jurisdiction and the amount of the security.

As I have said, reliance is placed on CPR 25.13(2)(c). The question is whether there is reason to believe that the Petitioner will be unable to pay the Applicants’ costs if ordered to do so and, as I have also mentioned already, no information has been provided about the Petitioner’s assets and liabilities other than that it is the owner of a 20% holding in the Company and a 20% holding in Otley.

As to the value of the Petitioner’s shares in the Company, Mr Potts’ submission is that the Company is hopelessly insolvent and that even its secured creditors will not receive all that is owing to them. He relies on the following (among other matters):

There is no material before me which would justify the conclusion that the Petitioner’s shares in the Company have any value (unless, perhaps, the Petitioners were to succeed on its Petition – but that is not relevant because the purpose of the security for costs application is to cover the Applicants against the risk of costs being irrecoverable if the Petition fails).

As to Otley, the position is complex. Otley owns an asset in the form of a potential development site near Leeds. A contract has been entered into with Barratts for the purchase of this land. It was originally conditional, but the conditions have now all been fulfilled. The contract was amended following satisfaction of the conditions and is now in a different form from its original. There remain, however, planning issues which have an impact on the price and the obligation to complete the contract. The parties take different views about the meaning of the contract. I need to say a little about it.

The “Purchase Price” means “(subject to clause 2.3.3 and clause 8.4.5) whichever is the higher of the Market Value and the Minimum Purchase Price”. The reference to clause 2.3.3 is an error since clause 2.3.3 was deleted in the amended contract. The Minimum Purchase Price is £8m exclusive of VAT. The old 2.3.3 provided for an adjustment in the purchase price if the costs of other land which was to be acquired (the Substation Land) exceeded £1m. If Barratts agreed, the excess of £1m would be added to the purchase price.

The reference to clause 8.4.5 (which remains in its original form) is problematical. It provides:

“The Seller shall not be obliged to accept a Purchase Price which is less that the Minimum Purchase Price but if the Market Value shall be agreed or determined at less than the Minimum Purchase Price then the Buyer may by notice in writing…..elect to pay the Minimum Purchase Price which shall then be the Purchase Price. ”

Given that the purchase price is the higher of the Minimum Purchase Price of £8m and the market value, and given that there is nothing other than clause 8.4.5 itself, or at least nothing which has been brought to my attention, in the original agreement or the amended agreement which might reduce the Purchase Price below the amount specified in the definition, it is not easy to see how clause 8.4.5 could ever bite: there would be no occasion on which Otley would ever be obliged to accept less than the minimum price. Clause 8.4.5 appears to be drafted on the basis that Barratts does not have to buy at £8m if the market value is less, otherwise granting it the right to elect to buy at £8m makes no sense. It must be strongly arguable – I certainly do not intend to decide the point in this judgement – that the contract does not oblige Barratts to purchase unless the market value exceeds £8m.

The position on the ground is apparent from an email from Mr Whitehorn, an agent for Otley dealing with Barratts. I should explain that there is under negotiation a section 106 Agreement relating to the provision of affordable housing. Unless and until that Agreement is made (and formalised) there can be no grant of planning permission. The evidence before me shows that no planning permission has yet been formally granted (whatever may have been agreed in principle with Leeds City Council). The position in relation to the section 106 Agreement appears to be that Leeds is prepared to reach agreement at 25% provision for affordable housing. Barratts’ position is that they require that to be reduced to 15% and, unless that is done, the land is not, they consider, worth £8m. There is pressure to complete a section 106 Agreement, however, because under the new UDP Rules which are coming into force later this year, there will be a requirement to provide 35% affordable housing.

Let me now refer to Mr Whitehorn’s email. In it he explains that the section 106 Agreement is being entered into to secure the planning consent. He states that Barratts can withdraw if they do not consider the land to be worth £8m and that currently they do not consider the land to be worth that figure. If the figure for affordable housing cannot be reduced from 25% to 15%, the £8m is not achievable and Barratts will walk away. That is the only evidence before the Court of what is perceived as likely to happen.

The description of the contract as conditional is inaccurate. But it does reflect how the parties see the contract as operating, that is to say in accordance with the construction which Mr Potts says is correct. To understand why, if he is correct, Barratts can walk away, I need to refer to one or two other provisions of the contract.

Completion is to take place on the Completion Date. Following through various definitions (of the definition of the Approvals Satisfaction Date and the Planning Satisfaction Date), the Completion Date cannot be before a planning permission has been granted. Clause 10.3 allows either party to terminate the contract after the Termination Date in the circumstances set out in Clause 10.1. That Date is defined in the definitions section subject to Clause 10.1 which provides for extension of that date but not beyond the Longstop Date, 30 June 2012. Cutting through this complexity, either party may terminate the contract on or after 30 June 2012 if a formal planning permission has not been granted by that time (subject to some exceptions which will not apply in the present case).

Mr Neville-Clarke submits that the section 106 Agreement at 25% has been agreed (although not formally completed) and that the overwhelming likelihood is that planning permission will be granted before 30 June 2012 so that, on the construction for which he contends, Barratts will be obliged to pay £8m. As I have said, it is strongly arguable that that is an incorrect construction. Thus, even if the section 106 Agreement is completed at 25%, there would be no obligation to complete.

But whatever the true construction, Mr Neville-Clarke submits that Barratts will nonetheless complete at £8m. I do not see why that should be seen as likely: they are clearly proceeding at the moment in an attempt to reduce the affordable housing element to 15%; but if they fail to achieve that, then the value of the land does not, on the evidence before me, reach £8m. The only evidence I have is from Mr Whitehorn, and that is to the effect that Barratts will not complete. At the very least, there is real uncertainty today that the contract will be completed, especially bearing in mind the construction of the contract on which everyone seems to be proceeding. I should note that, if it is completed, Otley will then be a company holding cash and there must be a very strong possibility of the Petitioner receiving cash from it in the short to medium term.

Even if the contract does not complete, Mr Neville-Clarke submits that the land will still have substantial value. That is, no doubt, correct; but what its value would be I do not know. More relevantly, I have no idea what would be done with the land if this contract falls through. It is speculation whether it would be sold as soon as possible at whatever price can be obtained or whether it would be retained by Otley to achieve a better price. There is simply no evidence about any of this.

In any case, the Petitioner’s asset is not a share in land in England. Rather, it is a 20% share in a Guernsey company, which holds that land. It is beside the point that the Mehta and Chandaria families control Otley. That control may have the result that the company’s own assets cannot be put out of the reach of its creditors or shareholders, but it is irrelevant to how the shareholders might deal with their own shares. Even if those shares were retained by the Petitioner, enforcement of a judgment against a Liberian company over assets held in Guernsey is unlikely to be an easy matter.

It is no answer to the application to say that security could be given over the Petitioner’s shares in Otley. First of all, I have no evidence about (i) how security over Guernsey company shares operates in practice or (ii) how easy it would be to enforce such security in relation to an English money judgment (ie for costs). As to the first, Mr Potts tells me that there is no register of charges over company shares in Guernsey. He may be right but I do not know that of my own knowledge and there is no evidence. But the fact that it might be right leads to concern about the effectiveness of such a charge so as to provide security against the actions of a Liberian company. In any case, it is much too late for the Petitioner to suggest that sort of security. There were, many months ago, discussions about the provision of such security. The Applicants went as far as providing a draft security agreement but rather than suggest amendments the Petitioner unilaterally withdrew.

Accordingly, it is my view that there is reason to believe, for the purposes of CPR 25.13(2)(c) that the Petitioner will be unable to pay the Applicants’ costs if ordered to so, in the light of the approach in Mbasogo.

Mr Neville-Clarke says that the delay in making the application should disentitle the Applicants from obtaining an order for security for costs. He has been unable to identify any prejudice to the Petitioner in relation to the delay which he alleges. Apart from the preparation of the Petition itself, not much has had to be done between its issue and the date of the application for security. Accordingly, in order for delay to carry much weight, it would have to be significant. In my view, there has been no relevant delay at all. The chronology is this:

I fail to see how the Applicants can be criticised for delay given that chronology. They could not issue the application before the Petition was issued. I do not consider that any complaint can be made that there was no application prior to the service of the Defence and the following directions hearing. In any case, the Applicants acted perfectly properly in waiting until they had valuations of the Company before making their application. Even with those valuations, the Petitioner relies on its 20% holding in the Company as being an asset within the jurisdiction of value rendering security unnecessary. That point is a bad point; but it might have been seen as a good point absent the valuations; or, at least, the Court might have been unwilling to make an order unless such evidence was obtained. The requests, unanswered, for financial information remained unanswered. Had it been shown that the Petitioner has substantial assets, or that its shareholders do, it might have been possible to agree some sort of security over those assets without the need for an application.

In my judgment, there is no reason to refuse the application on the basis that it was made too late in the day. I do not think that there was relevant delay at all. But even if that is wrong, it is of the slightest weight in the balance which has to be struck especially bearing in mind the absence of any prejudice flowing from that delay.

I propose to take this very shortly. The lengthy Petition was met with a 61 page defence. It is impossible – and contrary to authority – for the merits of such a substantial case to be reviewed on an application of this sort. Mr Neville-Clarke nonetheless addressed submissions to me in relation to selected aspects to show that, on those aspects, the Petitioner has a very strong case. He says, at least, that the prima facie case is overwhelming and that, even on an application of this sort, the Applicants must show an arguable defence supported by evidence. Even if it permissible to take this selective approach, the material selected must, if the Petitioner is to succeed, show that there is a high degree of probability that it will succeed. I am not satisfied that the Petitioner’s case comes near to that.

There are, of course, matters which, stated in isolation, would suggest serious breaches of duty by the directors in their management of the Company. The Defence, however, addresses all of these matters and I do not regard any of the defences as fanciful. Some of them depend, it must be acknowledged, on hotly disputed versions of conversations and oral agreements involving, unfortunately, in one case a family member who is no longer alive. No doubt the Applicants will face some evidential difficulties as a result. But ultimately, resolution of many factual issues will turn on credibility, as to which matters, one can already see, are not all one way.

Moreover, Mr Kapoor, the Petitioner’s solicitor, has been somewhat selective, or even wrong, about those parts of the selected areas which he has put forward in his witness statements and about which Mr Neville-Clarke made submissions. For instance, in relation to what have been referred to as the paper companies, not because they are insubstantial but because they deal in paper products, complaint is made that the Company’s assets have been used to support these companies in which the Shah family has no interest. But, as Mr Potts demonstrated, that family does have an indirect interest. Again, it is said that there is self-evidently a breach of duty in the light of the interest-free loans made by the Company to other companies in which the Mehta and Chandaria families had an interest but the Shah families did not. Quite apart from the defence that this was all agreed, it has been apparent from the Company’s accounts for a long period before these proceedings were commenced, that such loans had been made. Moreover, it is the Applicants’ case that the net borrowings as a whole as between the Company on the one hand and Mehta/Chandaria companies on the other, were in favour of the Company. From what Mr Potts showed me, there is clearly something in that point.

Thus the merits do not, in my judgment, come near the required threshold.

Accordingly, I accede to the Applicants’ application. Security should be provided either by payment into court or by a suitable bank guarantee unless the parties can agree some other form of security.