Security for costs can be viewed in two ways. Either it provides some degree of costs protection to those faced by claims from apparently impecunious companies or it is a device wielded against smaller companies designed to stifle genuine claims. Judge Coulson in the case of William Newman t/a Newman Associates v. Wenden Properties Limited & Anr [2007] EWHC 336 (TCC) was recently faced with this problem when dealing with an application for security for costs against a company with no assets but apparently linked to individuals with sufficient wealth to provide the security sought.
The starting point for application for security for costs can be found in section 726(1) of the Companies Act 1985 which provides that:
"Where, in England and Wales, a limited company is Plaintiff [Claimant] in an action, or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the Defendant's costs if successful in his defence, will require sufficient security to be given for those costs and may stay all proceedings until the security is given."
The defendant company in this case was a special purpose vehicle set up by two individuals, Dr. Iddenten and his wife, for the purpose of purchasing and refurbishing properties to be let out. The claimant brought a claim against the defendant for £23,819.75 in respect of unpaid fees for professional services rendered in connection with the refurbishment of a property in Isleworth, owned not by the defendant but by Dr. Iddenten and his wife. They also owned three other properties.
The defendant brought a counterclaim for professional negligence against the claimant in the sum of approximately £690,000 alleging that the claimant had grossly undervalued the cost of the refurbishment works at the property so that if the defendant had been properly informed of the true cost of the refurbishment works at the time, it would not have proceeded with these works and not borrowed money to fund them. The defendant also alleged that even if it were found that the refurbishment project would have gone ahead, it suffered losses because numerous items of work were carried out as variations, in circumstances where they should have been allowed for at the outset, and/or at a lower cost.
The claimant applied for security cost in respect of the defendant’s counterclaim, pursuant to section 726(1) of the Companies Act 1985. There was no dispute between the parties that the defendant, having no assets of its own, would be unable to pay the claimant’s costs of the counterclaim if it failed. The defendant claimed that the application for security for costs, if allowed, would here stifle a genuine claim. The claimant claimed that it would be out of pocket if the counterclaim was defeated and it was left to seek costs against a shell company.
The exercise of the court’s discretion in applications for security for costs was considered in Sir Lindsay Parkinson v. Triplan, in which the Court of Appeal indicated some of the circumstances the court might have taken into account. These included:
- whether the claimant’s claim was bona fide and not a sham;
- whether the claimant had a reasonably good prospect of success;
- whether there was admission by the defendant on the pleadings or elsewhere that money was due;
- whether there was a substantial payment into court or an "open offer" of a substantial amount;
- whether the applicant for security was being used oppressively, for example so as to stifle a genuine claim;
- whether the claimant’s want of means had been brought about by the conduct of the defendant’s, such as delay in payment or in doing their part of the work;
- whether the application for security was made at a late stage in the proceedings.
Judge Coulson distilled the following principles which he decided were of relevance to the present application:
(a) Where an order for security for costs against the claimant company might result in oppression, in that the claimant company would be forced to abandon a claim which has a reasonable prospect of success, the court is entitled to refuse to make that order, notwithstanding that the claimant company, if unsuccessful, would be unable to pay the Defendant's costs (see Aquilla Design (GRB) Products Ltd. -v- Cornhill Insurance plc [1988] BCLC, 134, Court of Appeal);
(b) Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that in all the circumstances it is probable that the claim would be stifled (see Keary Developments Ltd. -v- Tarmac Construction Ltd. [1995] 2 All E.R., 535, Court of Appeal);
(c) In all but the most unusual cases, the burden lies on the claimant company to show that, apart from the question of whether the company's own means are sufficient to meet an order for the security, there will be no prospect of funds being available and forthcoming from any outside source (see Kufaan Publishing Ltd. v Al-Warrack Bookshop Ltd., March 1st, 2000, Court of Appeal (unreported)).
It was said that the defendant was unable to provide security because it had no assets of its own, and a liability to the Bank of Scotland in the sum of £1.4 million odd. However this was simply a reflection of the way in which the defendant company was originally set up. It was always intended that the defendant company would have no assets. This lead the defendant to suggest that, because of the lack of assets, the court should simply assume that a genuine claim was being stifled. As can be seen from the above, this was something the court was not prepared to do.
Judge Coulson said that the party resisting the application for security on the grounds that a genuine claim would be stifled must demonstrate how and why other sources of funding are not available. The defendant did not do that here. In fact it appeared that there were a number of obvious ways in which such financing could have been provided. These included:
- Dr. and Mrs. Iddenten owned three other properties. No comparison was provided between the amount of the mortgage and its present value. Therefore it was a reasonable assumption that there was considerable equity in the properties. Property values have risen significantly in the last few years.
- Dr. and Mrs. Iddenten originally agreed to provide a schedule of assets. In the end, they failed to provide this. This surprised the Judge given the need to prove that a genuine claim was being stifled.
- There was evidence that the property in question was worth £1.63 million, which was £180,000 more than the defendant’s borrowings. Therefore, there appeared to be equity in the property itself against which money could be borrowed.
Therefore, the defendant had not demonstrated that there would be no prospect of funds being available and forthcoming from any outside source. Indeed, on the evidence before him, the Judge was confident that Dr. and Mrs. Iddenten could provide security on the defendant’s behalf, if they choose to do so. The Judge was satisfied that this was not a case where a genuine claim would be stifled if security was ordered. He decided that the right course to adopt was to order security up to, not the conclusion of the entire litigation, but the exchange of witness statements and he granted security for costs in the sum of £45,000 (including approximately £25,000 having already been incurred).
Judge Coulson’s judgment is clear that individuals with sufficient wealth to provide security for costs will not be able to hide behind the corporate veil afforded by their shell-company to resist an application for security for costs against that company. Whilst not a party to the proceedings, the burden of proof will effectively be upon these individuals to demonstrate to the Court that they too could not provide funding to grant the defendant security for their costs, so that an order for security for costs might result in a genuine claim being stifled.
Jeremy Glover is a partner at Fenwick Elliott LLP. To view further articles by Jeremy, please visit www.fenwickelliott.co.uk.
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