Absolute Living Developments Ltd v DS7 Ltd & Ors

This is an application by various defendants to these proceedings, DS7 Limited and others (the “Defendants”), against the claimant company (the “Claimant”) for security for costs. The amount of security sought is in the sum of £500,000. The basis for the application that there is reason to believe that the Claimant would be unable to pay the Defendants’ costs, should an adverse costs order be made against it.

For security for costs to be awarded, I must be satisfied that a two-stage test is met under CPR 25.13 (1) and (2)(c):

The criteria which I should use as a broad framework to structure the exercise of my discretion in respect of the second requirement is helpfully set out in Sir Lindsay Parkinson & Co v. Triplan [1973] QB 609. The statement of the law there set out has obviously been expanded upon and articulated further in a number of subsequent cases, but Triplan provides a helpful starting point for the manner in which I should approach the exercise of my discretion. I shall approach the question of whether it is just to make an order for security in all the circumstances using the Triplan guidance and the following heads:

I turn then to the first of the various factors I have described. As I have already noted, it is accepted by the Defendants that the Claimant’s claim is bona fide: but it is asserted that the claim is disputed on good grounds. In short, the Defendants say that the claim against them is arguable, but that I should go no further than this in assessing the merits.

By contrast, the Claimant contends that its claim has a very high chance of success, and that this is a factor that I should take into account.

If a court could reliably establish the outcome of the proceedings before it at the stage when a security for costs application is made, that would clearly be highly relevant. The court could say that because the claimant was very likely to succeed, the risk of an adverse costs order was therefore low, and security should not be ordered notwithstanding the claimant’s inability to pay costs, were an adverse costs order to be made. Conversely, if it were very clear that a claim, although technically arguable, was going to fail, that likelihood would be relevant to the assessment.

But that is precisely the problem. On an interlocutory application such as this, a court must be wary about being drawn into an analysis of the merits. The court does not have before it all of the relevant material that the trial judge will have. To go beyond assessing the arguability of a claim involves the court in a process that – in most cases – it is simply not equipped to carry out, because of the early stage at which the application is made in the proceedings.

For this reason, the notes in Civil Procedure 2018 make clear that it is important for the court to try to avoid a situation in which the merits have to be considered. The parties should not attempt to go into the merits of the case unless it can be clearly demonstrated one way or the other that there is a high degree of probability of success or failure.

Not only must it be possible for the merits to be established with a high degree of probability: that conclusion must be capable of being reached on the evidence before the court at the interlocutory stage extremely quickly in temporal terms. It seems to me that when the court is being asked to consider the merits, it is not enough for a point to be demonstrated to be a good or strong one after considerable and detailed analysis of the evidence before it. Given that this is an interlocutory application, the merits need to be assessed proportionately to the nature of the hearing.

In this case, I have – and I appreciate that this is not the only application that I have been dealing with – around eight or nine lever arch files of documents. I have been addressed by both counsel on the merits of the case for just under two hours. It seems to me that in such circumstances, it is not right for the court to be drawn into an adjudication of the merits. I readily confess that Mr. Sims, Q.C., on behalf of the Claimant, made a number of powerful points. I discouraged Mr. Mohyuddin, Q.C., for the Defendants, from responding to these points because I could see one of only two outcomes occurring. I would either, as I am choosing to do, not determine the point; or I would have to make a judgment that would engage so closely with the merits of the case as to be an affront to the way in which one should conduct interlocutory processes.

So for the purposes of the first factor, I am prepared to accept, as indeed is conceded by the Defendants, that the Claimant’s claim is a bona fide one, genuinely brought, and clearly not a sham. I leave open the question of whether there is a very high chance of success as a matter that I am unable to determine given the nature of the present application.

Taking matters out of order, I shall now deal with the third factor, because it is closely related to the first.

Whether the Claimant’s want of means has been brought about by the conduct of the Defendants is a factor that will generally be linked to the first point that I have just considered. Certainly, on the facts of this case that is so: in this case it is clearly asserted by the Claimant that monies were paid away from the Claimant by the Defendants in breach of duty.

Were that case to be made out then it would, I consider, follow that the Claimant’s want of means had been brought about by the Defendants’ conduct. There was, in this case, the interesting gloss, according to Mr. Sims, Q.C., that win or lose the Claimant would recover significant assets at the conclusion of the proceedings.

Again, there may well be something in this contention, but the same reasoning that I applied in relation to the first factor applies to this third factor. In a straightforward case, where the merits can easily be discerned and stated, it is likely also that the reason for the claimant’s want of means will similarly be clear. But in a case as complex as this one, I do not consider that I can appropriately conclude that the fact that the Claimant is now in liquidation is down to the Defendants’ breach of duty as alleged by the Claimant. If, of course, the various payments at issue in this case were made legitimately, then I do not consider that it could properly be said that the Claimant’s want of means was brought about by the Defendants’ conduct.

I do not, therefore, attach weight to this third factor.

I approach this application on the basis that the claim is properly brought, but that it is also being properly defended. On this basis, the risk of an adverse costs order against the Claimant is a real one, and it cannot with sufficient certainty be said that the Claimant’s likely inability to pay is a matter that can be laid at the Defendants’ door. Prima facie, therefore, given the Claimant’s want of means, and before consideration of the remaining factors, an order for security for costs would in this case be appropriate.

Moving to the last of the various factors that I have identified, I do not consider that questions relating to the funding of the Defendants, nor how they have conducted themselves in other aspects of these proceedings, to be a matter of any assistance in this application.

The manner in which the Defendants have conducted themselves in the past is not a matter to which I can properly pay regard, given the highly factual nature of the allegations advanced by the Claimant, even if I otherwise considered them material (which is frankly doubtful).

The manner in which the Defendants are funding themselves might very well be relevant if the boot were on the other foot and an application for security of costs were being made by the Claimant against the Defendants. But that is not the case here and I fail to see the relevance of the Defendants’ funding in the context of this application.

It therefore seems to me that the critical factor in determining whether security for costs should be ordered is the balance between the conclusion that I have reached in paragraph 17 above and the second of the factors identified in paragraph 3 above, namely whether the application for security is stifling a serious or genuine claim.

I was referred to a number of authorities on the question of stifling. It is appropriate to refer to a few of them. I begin with a decision of the Court of Appeal in Aquila Design GRB Products Ltd v. Cornhill Insurance plc [1988] BCLC 134 at 137 (per Fox LJ):

“It is necessary for the court, in looking at the whole matter, to take into account the burden on the plaintiff of having to provide security, with the result that it may have to abandon the action altogether in consequence of impecuniosity and an inability to provide the amount ordered by the court. In such cases there is therefore a danger of oppression as a consequence of making an order for security. That is one of the matters which is recognised in particular in the judgment of Megarry V-C, to which I have referred. Of course, creditors can put up money themselves, but the jurisdiction is not against creditors; it is against the company.”

That, I consider, is a particularly important and salutary point for me to bear in mind. The question is: can the company raise the money or can the company not raise the money with the result that the claim will be stifled?

In Keary Developments Ltd v Tarmac Constructions Ltd [1995] 3 All ER 534, in the course of a detailed judgment, Peter Gibson LJ set out various propositions which are relevant to the question of security for costs. He began by emphasising the importance of the case that I mentioned at the outset, Triplan. I will not read out all of the propositions articulated by Peter Gibson LJ, but only those with specific relevant to the question of stifling. Beginning at 539, Gibson LJ stated:

“(2)

The possibility or probability 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…By making the exercise of discretion under s.726(1) conditional on it being shown that the company is one likely to be unable to pay costs awarded against it, Parliament must have envisaged that the order might be made in respect of a plaintiff company that would find difficulty in providing security…

(3)

The court must carry out a balancing exercise. On the one hand, it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order of security. Against that, it must weigh the injustice to the defendant if no security is ordered and at the trial the plaintiff’s claim fails and the defendant finds himself unable to recover from the plaintiff the costs which have been incurred by him in defence of the claim. The court will properly be concerned not to allow the power to order security to be used as an instrument of oppression, such as by stifling a genuine claim by an indigent company against a more prosperous company, particularly when the failure to meet that claim might in itself have been a material cause of the plaintiff’s impecuniosity…But it will also be concerned not to be so reluctant to order security 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…”

That, I think, is all I need cite from Peter Gibson LJ’s judgment, but I stress I have borne in mind all of the principles that he has articulated in that judgment.

Finally, and really by way of completeness, I refer to the decision of the Supreme Court in Goldtrail Travel Ltd v. Onur Air Tasimacilik AS [2017] UKSC 57. There are two paragraphs to which I draw particular attention. At [18], the same point as I made earlier by reference to the decision in Aquila is made, namely that it is the company that is the relevant person who is to raise the money:

“When, in response to the claim of a corporate appellant that a condition would stifle its appeal, the respondent suggests that the appellant can raise money from its controlling shareholder, the court needs to be cautious. The shareholder’s distinct legal personality…must remain in the forefront of its analysis. The question should never be: can the shareholder raise the money? The question should always be: can the company raise the money?”

At [23], various principles applicable to the question of security are set out. I do not set them out, but only draw attention to this quotation:

“Has the appellant company established on the balance of probabilities that no such funds would be made available to it, whether by its owner or by some other closely associated person, as would enable it to satisfy the requested condition?”

That is all I propose to say about the law. It is necessary to turn to the facts.

The relevant facts are set out in the fifth witness statement of Mr. Davis, a solicitor acting on behalf of the Claimant. What Mr. Davis’ statement does, amongst other things, is set out in some detail the approach of the liquidator when in pursuing this claim on behalf of the Claimant pursuant to the liquidation. Paragraph 51 sets out the financial position of the Claimant and the manner in which the liquidator is proceeding with this claim:

“The Liquidator has provided me with an abstract from her ‘Receipts and Payments Account’ in relation to the liquidation of [the Claimant] for the period from 21 July 2016 to 11 May 2018. It shows receipts of nil, and payments of £1,324.00, illustrating that ALD has no cash from which to pay professionals. In these circumstances I can confirm that:

Paragraphs 52 and 53 of the statement then set out the limited derogations from this approach of causing professional fees to be incurred on only a fully deferred and contingent basis. There are some costs which cannot be, or which the liquidator has been unable to negotiate to be, paid on this basis. A number of expenses, including expenses of Swiss lawyers and others, have had to be made as disbursements out of the liquidator’s office. These amount to just under £65,000. The details are set out in paragraphs 52 to 54 of Mr Davis’ statement.

Paragraph 55 says this:

“I am instructed that Wilkins Kennedy [that is the liquidator’s firm] would not be prepared to pay security for the [Defendants’] costs in the sum of £500,000 or at all.”

Mr. Davis then considers, in paragraphs 83ff of his statement, the question of the Claimant’s ability to fund any security it might be ordered to pay. Essentially the point made by Mr. Davis is that the claim would be stifled. Mr. Davis says is that the Claimant has insufficient means itself and that is it is unable to obtain assistance from a third party who might reasonably be expected to provide assistance.

In paragraph 85, Mr. Davis sets out a list of the parties who might, but who in the event, he says, cannot, assist the Claimant in funding any order for security. It is appropriate that I read extensively from paragraph 85:

“Further, having taken steps to investigate the issue, [the Claimant] cannot obtain assistance from a third party who might reasonably be expected to provide assistance if they could:

(a)

In accordance with standard practice, the Liquidator would not be prepared to provide funds to stand as security for costs, and nor would her firm, Wilkins Kennedy LLP;

(b)

The Liquidator has rejected the possibility of approaching the creditors to provide funds to stand as security for costs (either with cash or guarantee / bank guarantee for the following reasons:

(i)

The largest creditor, by proof of debt lodged (albeit that no supporting documentation to verify the amount claimed has been provided) is £24,255,721.77 by DS7. For the obvious reason that DS7 is the primary Defendant in this claim, the Liquidator is not able to approach the entity that purports to be the largest creditor in this liquidation for security for costs.”

Pausing there, this point is entirely accepted by the Defendant, who make no criticism of the failure to approach DS7. Going on with paragraph 85:

“(ii)

The majority of the remaining creditors are the unit buyers. The number of claims that the Liquidator has received to date is 514. (Footnote: ¹) The Liquidator has considered approaching those unit buyers, but rejected the idea because they are not, to her knowledge, wealthy people; and are very unlikely to be in a position to provide funds to stand as security in circumstances where they have lost considerable sums on account of the unlawful conduct of the Defendants.”

That is all I am going to read from paragraph 85. I should say that paragraph 85(c) describes the steps that the liquidator has taken with a view to obtaining a quotation for after the event insurance. For reasons that I am not going to go into – but I stress I make no criticism of either party – it has not been possible to obtain a quote.

I do not consider that I am hampered in reaching a decision in this regard. It seems to me that the question that I must address is one of principle, namely whether the claim would be stifled by reason of the Claimants’ lack of assets. If I conclude that it would be, it really makes no odds one way or the other whether the security is ordered by way of a payment into court or by way of a premium for after the event insurance. That, it seems to me, is a detail that can be ironed out later were I to make an order for security. The real question is one of stiflement.

The position is as follows:

I conclude that there is no source of funding available to the Claimant that would enable it to finance an order for security for costs, were I to make one. Viewing, as I must, the question of whether it is the company that can raise the money, it is clear that it cannot. I therefore conclude that there is a clear risk – indeed, I put it rather higher than that – that were I to make an order for security for costs, this claim would be stifled; and that a bona fide and genuine claim would not be brought.

I must, in light of my conclusions in paragraphs 17 and 34 above conduct a balancing exercise as between the interests of the Defendants and those of the Claimant. Because the Claimant is in liquidation, it is really the interests of the creditors of the Claimant that I must have in mind. I conclude that the balance in this case clearly favours the liquidator continuing to bring these claims on behalf of the Claimant for the benefit of the Claimant’s creditors, and that the Defendants therefore should not have security for costs.

I therefore conclude that the application for security for costs must be dismissed.

In light of this conclusion, it is not necessary for me to deal with the fourth factor, the lateness of this application. However, because I was addressed on it, I say a few words. The conduct of the Defendants in bringing this application when they did is not something that would have caused me to reject the application.

Whilst it is plain that applications for security for costs need to be brought early on in the proceedings, the reason that is the case is this: if a claimant proceeds some way down the litigation route before an application for security is made, were security for costs to be applied for and obtained, that might cause the claimant to cease to prosecute the claim, with the result that the costs already incurred would be thrown away. That is the reason why applications for security for costs need to be brought promptly.

I do not consider that this is such a case. This is a case which started by way of ex parte applications for freezing injunctions, which moved on to inter partes applications. I do not consider that the Defendants can properly be criticised for the timing of this application.

However, for the reasons that I have given, the Defendants’ application for security for costs is dismissed.