Debt – reasons relating to an application for security for costs by
the plaintiffs.
[2016]JRC089D
Royal Court
(Samedi)
28 April 2016
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Before :
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Advocate M. J. Thompson,
Master of the Royal Court
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Between
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Daniel Young
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First Plaintiff
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Simon Jonathan Young
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Second Plaintiff
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Michael Christopher Goulborn (practising
under the name and style of Bois Bois, a firm)
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Third plaintiff
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And
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John Keith Haden MBE
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First Defendant
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Incat Equatorial Guinea Limited
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Second Defendant
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Incat Equipment Rental Limited
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Third Defendant
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Incat Technical Services Limited
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Fourth Defendant
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Integrated Petroleum Services Gabon Limited
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Fifth Defendant
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Advocate A. D. Hoy for the Plaintiffs.
Advocate R. A. Leeuwenburg for the
Defendants.
CONTENTS OF THE JUDGMENT
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Paras
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1.
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Introduction
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1
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2.
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Background
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2-12
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3.
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Issues
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13
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4.
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The parties’ contentions
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14-16
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5.
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Decision
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17-18
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6.
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Security for costs of a counterclaim
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19-21
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7.
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The position of the first defendant
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22-31
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8.
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The position of the defendant companies
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32-48
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9.
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Conclusions
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49
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judgment
the master:
Introduction
1.
This
judgment represents my decision in relation to an application for security for
costs by the plaintiffs as defendants to the counterclaim.
Background
2.
These
proceedings arise out of a claim for unpaid fees by the plaintiffs between 2007
and 2010 in the sum of £367,536.74 plus accrued interest at a rate of 1%
per month until payment. The
proceedings were commenced by an order of justice issued on 20th October,
2014.
3.
An answer
and counterclaim was filed by the defendants on 21st November,
2014. In the answer and
counterclaim the first defendant raises specific defences that he did not
personally agree to retain the plaintiffs and did not agree to bear
responsibility for the plaintiffs’ fees. All defendants also challenge the
quantum of the fees. The defendants
finally deny liability on the basis of a counterclaim by reason of alleged
negligence and/or alleged breaches of duty by the plaintiffs. On the face of the pleading the
counterclaim is advanced by all the defendants including the first defendant
and damages in the sum of $8 million are claimed.
4.
The
background underlying the plaintiffs’ claim for unpaid fees and the
counterclaim is a transaction and subsequent dispute between Incat Group including
the second to fifth defendants (“the defendant companies”) and Luba
Freeport Limited (“Luba”) as described at paragraphs 2 to 12 of the
judgment of the Royal Court given by Commissioner Clyde-Smith Incat v Luba
[2008] JRC 140 dated 21st August, 2008,. I adopt these paragraphs for the purposes
of this judgment.
5.
The
specific complaints of the defendants are set out at paragraphs 40-48 of the
answer and counterclaim as follows:-
Breaches of duty by the Plaintiffs and loss suffered as a
consequence
“40. The Plaintiffs acted in
breach of the duties set out above at paragraph 40 above in the following ways
and the Incat Group (and/or the First Defendant if (which is denied) the First
Defendant personally engaged the services of the Plaintiffs) suffered the loss
set out below.
41. The Plaintiffs failed to protect the
interests of the Incat Group by failing to insist on, and to secure, the
incorporation into the Share Sale Agreement and/or the Side Letter of a
provision obliging Luba to repay the Debt within a fixed period of time in the
event that bank financing was not achieved by a specified date.
42. Had the Plaintiffs acted in accordance
with its duty and secured such provisions then the Incat Group:
42.1. Could have enforced the totality of the Debt.
42.2. Would not have incurred its own legal costs of the 2006
Proceedings and/or would not have become liable for Luba’s adverse costs
of £562,000.
42.3. Would not have been obliged to compromise the totality
of its claim as it did.
43. Further, the Plaintiffs acted in
breach of duty and/or were negligent in advising the Incat Group to commence
and/or prosecute the 2006 Proceedings (or in failing to advise the Incat Group
not to commence and prosecute those proceedings) in circumstances where (as is
clear from the judgment in the 2006 Proceedings) the 2006 Proceedings had no
real prospect of showing that any sum was at that time due under the Debt and
the Plaintiffs ought to have known that.
44. By reason of the Plaintiffs’
said breach of duty and/or negligence, the Plaintiffs caused the Incat Group to
incur the legal costs of the 2006 Proceedings and to become liable for
Luba’s adverse costs thereof.
45. In seeking the stay of the Costs
Order, the Plaintiffs were in breach of duty and/or negligent in that the
Plaintiffs failed to represent the Incat Group’s interests properly
and/or adequately, thereby exposing the Incat Group to the enforcement of the
Costs Order before Luba’s liability to pay the Debt had been
established.
46. Further, the Plaintiffs were in breach
of duty and/or negligent in that they failed to advise the Incat Group to assert a set off of the Costs Order
against the amount of the Incat Debt which vastly exceeded the amount of the
Costs Order.
47. As a consequence of the
Plaintiffs’ said breaches of duty and/or negligence, the Incat Group was
faced with the threat of imminent enforcement of the Costs Order which would
inevitably have led to its insolvency.
The Incat Group was, accordingly, obliged to enter into the Luba
Settlement Agreement on terms that were manifestly and seriously
disadvantageous to it. But for the situation caused by the Plaintiff’s
said breaches of duty and/or negligence, the Incat Group would not have entered
into the Luba Settlement Agreement.
48. In the premises, the Incat Group has
lost the full value of the Debt and incurred unnecessary wasted costs.”
6.
In the
reply to counterclaim, the plaintiffs in summary allege firstly that Luba or
Lonrho would not have agreed to change the terms of the Side Letter. Paragraph 23 of the reply therefore
pleads as follows:-
“23. As to paragraphs 21
and 22 the Plaintiffs have no knowledge as to who drafted the Side Letter, which
reflected the terms of the discussion set out above. The draft Side Letter was received from
Mr Haden by fax on or about 26 April 2006 who was staying at the Royal Garden
Hotel in London. On 27 April 2006
the Second Plaintiff sent a fax to Mr Haden marked *URGENT* at 20:38 stating
“As discussed I am not happy that this document provides the adequate
security for a large debt!”
Discussion at the telephone was thereafter had between Mr Haden and the
Second Plaintiff on or about 28 April 2006 and the Second Plaintiff noted at
09:43 –“SY [the Second Plaintiff] speaking with JH [Mr Haden]
– Happy with draft of SY.
Happy with $5 million or $4.5 million.” The Second Plaintiff’s draft of
the Side Letter was sent to DLA Piper and provided a back stop date of 31
October 2006 (as to 75% of the debt) and 31 October 2011 for the balance as to
payment of the debt allegedly due to the Companies or some of them. The Second Plaintiff had discussed the
terms of the draft with Emma Priestley of Lonrho on or about 28 April 2006 who
had advised the Second Plaintiff of the letter signed by Mr Haden dated 18
April 2006 (as pleaded at paragraph 22 above) and stated that Lonrho were
simply not prepared to change the terms of the letter, it was take it or leave
it. The Second Plaintiff wrote to
Mr Haden by letter dated 5 May 2006 and faxed to him whilst he was staying in a
hotel in Singapore, on his way to Melbourne: “With respect to the side
letter, as we have discussed at the telephone, there is no possibility of negotiating
any better deal with respect of the same.
In the circumstances, if you are happy with the contents of the side
letter, please sign and return by fax to …”[12]. . These facts were found as
facts by the Commissioner at paragraphs 19 to 29 of the case reported at [2008]
JRC 140 and the Defendants are consequently estopped from advancing any other
case. Save as aforesaid paragraphs
21 and 22 are denied.”
7.
The
plaintiffs further allege that the decision whether or not to sign the Side
Letter was a commercial one and it was the first defendant who agreed the terms
of the Side Letter having received advice that its terms did not provide
adequate security.
8.
In
relation to the conduct of the proceedings paragraph 39(2) and (3) of the reply
states as follows:-
“39. Paragraph 39 is
denied. In particular:
(2) in relation to paragraph
39.2 the Plaintiffs repeat paragraph 27. above. The Plaintiffs instructed Grahame Aldous
of Counsel on 8 February 2007 with respect to the matter who advised that the
Royal Court might determine that the implied term argument was a poor cause of
action, that a reasonable period for Luba to seek bank financing could likely
be any period of time and that the better causes of action were as suggested by
him as included in the Re-Amended Particulars of Claim. Mr Haden agreed the amendments should be
made and instructed the Plaintiffs to continue. The alternative claims were advised by
highly regarded Counsel against whom any direct action by the Defendants is now
prescribed. In the circumstances
this allegation is without merit;
(3) as to paragraph 39.3 the
plaintiffs repeat paragraph 34 above.
The defendants admit they had no money and were thus unable to prosecute
the 2009 action or make any further applications. Mr Haden was advised that the best way
of trying to halt matters was to put up security for the costs and to commit to
prosecuting the 2009 action. None
of the Defendants were able to commit to either course of action.”
9.
In respect
of the allegation that the plaintiffs’ conduct meant that the defendants
were compelled to settle with Luba on unfavourable terms, the defendants aver
that the compromise was due to the inability of the Incat Group to put up
security for costs due to Luba and/or fees to prosecute a claim for the debt as
well as the Incat Group previously refusing to settle with Luba on terms
contrary to the recommendations of the second and third plaintiffs.
10. On 7th April, 2015, directions were
given for discovery followed by a stay for mediation. In fact mediation did not take place
until November 2015 and regrettably was unsuccessful.
11. The plaintiffs’ application for security
for costs was issued on 29th February, 2016. It was not issued earlier as I was told
that the plaintiffs wanted to try to resolve the dispute first before seeking
security for costs. In this case
therefore I do not consider there has been any unnecessary delay in the
plaintiffs making the application.
The application was supported by an affidavit of Mr Dexter Flynn an
experienced English Solicitor employed by Voisin Law, Advocates for the
plaintiffs. Mr Flynn’s
affidavit exhibited certain accounts of the defendant companies between 2008
and 2010, and also contained a schedule of the costs incurred by the plaintiffs
up to the date of the application and an estimate of future costs.
12. The first defendant filed an affidavit on
behalf of all the defendants in opposition to the applications for security for
costs sworn on 28th March, 2016. The affidavit is material to the
application and I therefore set out paragraphs 5 to 12 of Mr Haden’s
affidavit in full as follows:-
“5. I am personally
resident, and own immovable property, in Jersey. I intend to raise the same arguments
personally in defence of the Plaintiffs’ claim as I intend to procure the
Second to Fifth Defendants raise both in their defence of the Plaintiffs’
claim and in prosecution of the Second to Fifth Defendants’
counterclaim. The facts
underpinning those arguments are fully set out in the Answer and Counterclaim
in these proceedings dated 21 November 2014. The arguments will be heard, whether in
the context of the claim or the counterclaim. I do not understand what additional
costs could arise in respect of the counterclaim above those which would arise
in the claim.
6. Each of the Second to Fifth
Defendants is a company incorporated in Jersey (the “Companies”).
Each of the Companies trades from Jersey at the address given above (see
exhibit JKH4). None of the
Companies is a shell. In other
words, the Companies occupy real office space, employ staff, and operate bank
accounts in Jersey. While each of
the Companies has assets outside the jurisdiction of this Court, the Companies
are each unequivocally within the jurisdiction for the purposes of enforcement
or otherwise.
7. Because these are dynamic
trading companies, not static holding companies, they have cash flow. That cash flow is relatively limited at
the present time, due to the circumstances set out in the counterclaim, which
had and continues to have a significant commercial disadvantage on the Incat
Group as a whole and the Companies in particular. Nonetheless, the Companies have cash
flow and the Viscount would be capable of enforcing costs against cash in
Jersey.
8. Furthermore, the Companies
have significant assets in, inter alia, Equatorial Guinea. While I concede that access to, and the
realising of value of, those assets is not as simple as access to cash in a
Jersey bank account, there need not be any concern about enforcing against
them.
9. Neither I, nor the Companies
– which are within my stewardship – seek to avoid our
liabilities. I have always had a
generally good relationship with the Second Plaintiff, and that continues to
this day. If I or the Companies are
ultimately found to owe the Plaintiffs some money, whether in respect of the
substance of the claim or the costs associated therewith, I shall endeavour to
satisfy those liabilities.
10. In any event, the Viscount
can compel the Companies to realise value and discharge any adverse costs order
by reason of the Companies’ location within the jurisdiction of this
Court. Were she required to take
steps in, for example, Equatorial Guinea, she would require an undertaking from
the Plaintiffs as to her costs of doing so. These can be the only costs additional
to the Plaintiffs’ natural costs of prosecuting the claim. However, the assets of the Companies in,
for example, Equatorial Guinea, are sufficient to satisfy any adverse costs
order against the Defendants, and the whole of the sum claimed by the Plaintiffs
in their claim, as well as the Viscount’s costs of enforcing the costs
order outside the jurisdiction.
Thus, the Plaintiffs would recover the Viscount’s costs of
enforcing overseas and would not therefore be required to perform the
undertaking they would have given.
11. The Companies trade in a
relatively small global market. Bad
publicity, especially as to the honouring of liabilities, would be fatal to the
business of each of the Companies.
The Companies would not therefore take any steps to avoid or evade an
adverse costs order.
12. An order requiring the
Companies to provide security for costs in anything other than a nominal sum
would, unequivocally, stifle the counterclaim and prevent the defence of the
claim. The Companies do not have
enough cash flow or liquid capital to satisfy such an order and continue
trading. They Companies would
choose to continue trading and thus these proceedings would have to be
compromised on oppressive terms.
Ironically, this is very similar to the circumstances which the
Plaintiffs caused by their negligence as set out in the counterclaim.”
Issues
13. In respect of the plaintiffs’ application
for security for costs, the issues it is necessary for me to determine are as
follows:-
(i)
To what
extent can security for costs be ordered in respect of a counterclaim;
(ii) What is the effect of the first defendant being
a Jersey resident on the application for security for costs against the
defendant companies;
(iii) Would an order for security for costs probably
stifle the counterclaim in view of the financial position of the defendant
companies?
The parties’ contentions
14. Advocate Hoy for the plaintiffs contended as
follows:-
(i)
The Incat
Group is insolvent on a balance sheet basis as far as can be understood from
the accounts of the defendant companies that have been provided;
(ii) The Incat Group might be insolvent on a cash
flow basis and could be trading while insolvent;
(iii) There is no evidence by reference to Mr
Haden’s affidavit that there are any assets in his own name which could
be used to meet an order for costs;
(iv) The counterclaim is much more than a
defence. It is a substantive claim
in its own right, which vastly exceeds the plaintiffs’ claim for fees;
(v) The position is no different from the position
in an unreported judgment, Jubilee Scaffolding Limited v Mark Amy Limited
1993/167, which I drew to the parties’ attention. The relevant extract starts on page 3 of
the decision as follows:-
“However, in England there
has been a more recent Judgment in the Court of Appeal concerning this very point,
namely Hutchinson Telephone (UK) Limited –v- Ultimate Response Limited
[1993] BCLC 307. This case was
decided on 10th August, 1992 but has not been mentioned in the 1993 White Book
nor in any of the supplements thereto to date. In this case the previous cases were
reviewed.
I am going to quote a number of
sections from that Judgment as follows:-
(a) From page 310, commencing just below g –
“In the Supreme Court
practice 1991, 23/1-3/8, at the foot of p 415, it is said against the rubric
‘Counterclaiming defendant resident abroad’:
‘The mere making of a
counterclaim does not put the defendant in the position of plaintiff under r
1(3); the question is whether, in the particular case, the counterclaim is a
cross-action or operates as a defence.”
(b) From page 311 beginning at section e where
there is a quotation from the case of Neck –v- Taylor [1893] 1 QB
560 at page 562 as follows:-
“Where, however, the
counterclaim is not in respect of a wholly distinct matter, but arises in
respect of the same matter or transaction upon which the claim is founded, the
court will not merely because the party counterclaiming is resident out of the
jurisdiction, order security for costs; it will in that case consider whether
the counterclaim is not in substance put forward as a defence to the claim,
whatever form in point of strict law and of pleading it may take, and, if so,
what under all the circumstances will be just and fair as between the parties;
and will act accordingly,”
(c) From the top of page 313 as follows:-
“The question is whether in
the particular case the counterclaim is a cross-action or operates as a
defence, that is to say merely operates as a defence.”
(d) From page 314 below g as follows –
“Incidentally asking for
damages arising out of the same transaction is a different matter to putting
forward a substantive cross-claim which will stand on its own and goes beyond
being a mere defence, which has lost the essentially defensive character of a
mere defence. If one is considering
whether the counterclaim is indeed a mere defence or a cross-claim in its own
right which might well stand and be proceeded with even though the original
claim was abandoned, the marked discrepancy in size between the amount claimed
in the action and the very much greater amount claimed by the cross-claim must
be, in my judgment, a relevant factor.
One has therefore to look at the
nature of the counterclaim and I therefore turn to the.”
(vi) If the counterclaim failed an order for costs
would not be made against the first defendant because he had no counterclaim. The loss alleged to be suffered is that
of the defendant companies not that of the first defendant.
(vii) The application was made promptly once
mediation had failed. The
defendants should not be refused security in these circumstances.
(viii) The plaintiff’s defence to the
counterclaim was a strong case on the merits because Commissioner Clyde- Smith
found in Incat v Luba [2008] JRC 140 that Luba or Lonrho would not have
accepted an express time limit for the payment of the debt due to the Incat
Group. The Royal Court judgment at
paragraph 29 stated:-
“These amendments were not
accepted by Lonrho and Mr Lenigas and Miss Priestley gave evidence that there
was no way in which they would have agreed to the insertion of any terms which
would have had the effect of setting a definitive time frame for the provision
of bank debt financing for payment of the Incat debt. Those amendments were therefore removed
from the draft.”
(ix) To the extent that Mr Haden is funding the
litigation including the counterclaim brought by the second to fifth
defendants, I should ignore the possibility that a third party costs order
might be made against the first defendant.
(x) The affidavit of the first defendant does not
give any information either about his own position or about the position of the
defendant companies and raises more questions than it answers.
15. Advocate Hoy fairly accepted that the first
defendant had raised a specific defence that he was not personally liable and
that all the defendants that challenged the reasonableness of the fees
claimed. In respect of these
defences he accepted that security for costs could not be claimed and a one
third deduction in respect of his schedule of costs was not inappropriate.
16. Advocate Leeuwenburg in response contended as follows:-
(i)
While the
first defendant, a Jersey resident did not own any immovable property in his
own name, he owns immovable property in Jersey through a company. However the first defendant’s
instructions were that there is insufficient equity in that property to meet
the amount of costs claimed.
(ii) In producing the latest available accounts for
each of the defendants companies, these companies are still in poor financial
health and therefore an order for security in the amount sought would probably
stifle the counterclaim. By
reference to what is set out in the first defendant’s affidavit an order
for security would leave the defendant companies with the choice of either
ceasing trading or withdrawing the counterclaim.
(iii) The position the defendants finds themselves in
was due to the negligent advice of the plaintiffs.
(iv) Impecuniosity of itself is not a basis to
justify an order for security.
(v) The defence and counterclaim of the defendants
stand or fall together. The
position is not therefore the same as in Jubilee.
(vi) The defendant companies are not empty shells
and the first defendant was not in the same position as the individual
plaintiff in Home Farm Developments v Le Sueur [2014] JRC 131.
(vii) All the defendants are in Jersey and the
defendant companies are all trading.
(viii) To the extent I felt I did not have sufficient
information I should allow the defendant companies more time to provide
additional information.
(ix) In any event sufficient information has been
provided unlike in the case of Orange Capital (Proprietary) Limited and Ors
v Standard Bank Jersey Limited [2013] JRC 221A where no information was
provided by the plaintiff companies against whom security was sought. The information provided was sufficient
for me to be satisfied that the counterclaim would probably be stifled if the
security requested was ordered.
(x) There are bank accounts in Jersey and other
assets overseas against which a costs order in favour of the plaintiffs can be
enforced.
(xi) My duty was to find a balance between injustice
to the defendants if prevented from pursing a genuine counterclaim and on the
other hand injustice to the plaintiffs if no security was ordered and the
plaintiffs were unable to recover the costs of resisting the counterclaim
successfully.
(xii) If I was minded to award security then any
security should be ordered should be limited to the costs of enforcement
because costs would otherwise be incurred in defending the claim in any event.
Decision
17. Where security for costs are sought against
companies, the starting point in respect of an application for security for
costs is paragraph 42 of the judgment of Commissioner Clyde-Smith in Café
de Lecq v Rossborough (Insurance Brokers) Limited [2011] JLR 31 which
provides as follows:-
“42 …… Our conclusions are as
follows:
(i)
There is no presumption or principle that Jersey-resident corporate plaintiffs
are not required to provide security for costs or that security for costs
orders will only be made against Jersey-resident corporate plaintiffs in
exceptional circumstances.
(ii) The
principles to be applied when considering an application for security for costs
against a corporate plaintiff are those set out in A.E. Smith (9).
(iii)
The court is concerned with the effect of such an order upon the corporate
plaintiff, not upon its directors, beneficial owners or other backers.
(iv) The
possibility that the successful defendant may be able to apply for a costs
order against a third party in the event that the assets of the unsuccessful
corporate plaintiff are insufficient to meet its costs should not be taken into
account.”
18. This is the approach I have adopted in this
case.
Security for costs of a counterclaim
19. Where security for costs is sought in respect
of a counterclaim, I agree the approach to be taken is that set out in Jubilee
Scaffolding and the extract cited at paragraph 14(e) above.
20. In my judgment there is no distinction between
the conclusion reached by Judicial Greffier Le Marquand in the Jubilee
Scaffolding case and the present counterclaim. The counterclaim is a counterclaim that
goes beyond being mainly a defence and has lost the essentially defensive
character of any defence. The
counterclaim, if the plaintiffs’ claim for fees were withdrawn could
stand alone and proceed to trial without adjudication on the claim for unpaid
fees. There is also a marked
discrepancy between the amount of fees claimed (although not small) and the
amount of the counterclaim which is very much greater. I am therefore satisfied that security
for costs can be ordered in respect of a counterclaim in principle and this is
the type of counterclaim which justifies security for costs being ordered. Whether I should do so depends on the
answer to the remaining two questions I have identified.
21. I also do not accept Advocate
Leeuwenburg’s contention that the only security I should require if I
were to order security are the costs of enforcement. This contention does not reflect the
reality of the counterclaim and is inconsistent with the approach set out in
the Jubilee Scaffolding case.
The position of the first defendant
22. I now turn to consider the effect of the
position of the first defendant as a Jersey resident and whether this prevents
security for costs being ordered against the second to fifth defendants in
respect of the counterclaim.
23. I considered this issue in the Home Farm
case and at paragraphs 25 to 27 of that decision I stated as follows:-
25. The
view I have reached that is that the presence of an individual co-plaintiff
within the jurisdiction is a factor that I am entitled to take into account in
deciding whether or not to order security for costs. The well-known factors set out in
L’Eau des Iles v A E Smith & Son Limited [1999] JLR 319 include the
court having a complete discretion whether or not to order security at all. The court may also order security of any
amount and need not order substantial security. The court has to balance injustice to
the plaintiff company by ordering security against injustice to the defendant
if no security is ordered. The
presence of a resident individual co-plaintiff is weighed in the balance along
with the other matters the court may take into account.
26. Without
in any way limiting the discretion vested in the court, particular factors of
the resident plaintiff that are likely to be looked at are the
individual’s financial position, whether he or she owns real property and
its location, the nature of the relationship between the resident individual
and the companies, the nature of the claims brought by the resident plaintiff and
what assurances may have been given about meeting costs orders.
27. I
therefore do not agree that the mere fact that the co-plaintiff is resident in
Jersey is of itself sufficient not to require corporate plaintiffs to provide
security. Rather it is a factor
that should be taken into account in deciding whether or not to order security
as a matter of discretion. In some
case it will be a powerful and even a conclusive factor; in others it will
not.”
24. Applying the above approach, in respect of the
first defendant, firstly I was informed at the hearing that he owned immoveable
property through a company and not in his own name contrary to the impression
given by the first sentence of paragraph 5 of his affidavit. I was also informed at the hearing that
there is insufficient equity to meet the order for security sought by the
plaintiffs. What I was not told was
the value of the property or the amount of any indebtedness secured against it
or owed by the company as legal owner of the property. I was also not told anything else about
the first defendant’s financial position in terms of his earnings or any
other assets in his name or to which he is legally or beneficially entitled or
where he has some form of interest or any debts he may owe. Yet it is clear from the first
defendant’s affidavit that he understood the applicable principles on a
security for costs application, or had been advised about them. I have therefore concluded that the lack
of information provided by the first defendant about his financial position was
a conscious decision on his part despite being aware of the sort of information
that was likely to be required.
25. In respect of his relationship with the
defendant companies, as set out in the answer and counterclaim it appears that
the first defendant is in some manner beneficial owner of or ultimately
interested in some unspecified way in 75% of the shares of the defendant
companies. I have reached this view
by reference to paragraph 2 of the answer and counterclaim. However, the first defendant in his
affidavit does not address his interest in the companies other than to say they
are “within his stewardship”. What he does not do is choose to set out
the precise structure of the Incat Group or his interest in it and how his
interest is currently held.
26. The assurance he gives in respect of any costs
orders made against the defendant companies if the counterclaim fails is also
vague. He simply states “I shall endeavour to satisfy those
liabilities”. That is
very far from an assurance that either personally or through the defendant
companies he will ensure that any adverse costs order is met.
27. In his affidavit while he states that the
counterclaim is that of the second to fifth defendants this is contrary to
paragraph 13 of the answer and counterclaim
which states as follows:-
“13. To the extent that the Defendants
(or any of them) have any liability to the Plaintiffs, that liability is
extinguished by reason of negligence and/or breach of duty of Plaintiffs as set
out in the Counterclaim herein which prevent any liability arising in respect
of the services in question.
Further, or alternatively, the Defendants (and each of them) are
entitled to set off any of the sums due in respect of the Counterclaim against
any sums otherwise due to the Plaintiffs in diminution or extinction
thereof.” (Emphasis Added)
28. While Advocate Leeuwenburg accepted that no
loss had been suffered by the first defendant in respect of the counterclaim,
the same factual matters are relied upon by the first defendant to extinguish
or set off any liability for fees claimed by the plaintiffs. In my view therefore the first defendant
is running the same arguments as the other defendants in respect of the third
part of his defence and is asserting the same allegations of breach of duty as
the other defendants to argue that any liability for fees is extinguished
because if properly advised then certain fees would not have been incurred in
the first place. What the other
defendants also argue which the first defendant cannot is that fees found to be
due can be set off against any loss if a breach of duty is established. The breach of duty in both cases advanced
is however the same.
29. What this means is that in my view, based on
the answer and counterclaim as presently pleaded, if the allegations of
negligence made by the defendants fail, then I consider it is more likely than
not an adverse costs order will be made against the first defendant as well as
against the other defendants. This
is because the first defendant at present is relying on the same matters to
deny liability for fees. This view
does not mean that the first defendant may not have arguments to contend that a
costs order should not be made against him which is a matter for the trial
judge. However, in deciding whether
or not to order security for costs, I must take into account that, as matters
stand, it is more likely than not that an adverse costs order will be made against
the first defendant if the allegations of negligence made at trial are not
accepted or proved. This is a
factor in the defendant companies’ favour.
30. However the first defendant does not appear to
accept that costs orders may be made against him if the answer and counterclaim
fail which is why in his affidavit he appears to distance himself from the
pleaded counterclaim and argues that the counterclaim is that of the defendant
companies only him. The affidavit
fails to address his reliance on the same allegations of negligence by way of
defence. The first defendant also
has not indicated that he would voluntarily meet any costs orders made against
the defendant companies. His
affidavit simply states that if he or the companies are ultimately found to owe
the plaintiffs money, he would endeavour to satisfy those liabilities. As set out at paragraph 26 above I am
not satisfied any significant weight can be attached to such an assurance. The view I have reached therefore in
respect of the first defendant is that his presence as an individual within the
jurisdiction does not prevent me from ordering security for costs against the
defendant companies, if otherwise I am satisfied it is appropriate to do so in
this case.
31. I have reached this view because, while the
position of the first defendant is not as extreme as that of the third
plaintiff in the Home Farm case (see paragraph 28 of the Home Farm
decision), the first defendant has no real property in his own name, has only
provided through his advocate oral information about that property, the
information provided about the real property owned through a company is limited
and no other financial information is provided as set out at paragraphs 24 and
25 above. This lack of information
is a conscious decision on his part. He has not indicated that he will meet
any costs ordered to be paid by the second to fifth defendants, but only that
he would endeavour to pay them without stating how that might be achieved. In exercise of the discretion vested in me
I am not therefore persuaded that I should exercise my discretion not to
require the second to fifth defendants to provide security for costs merely
because of the first defendant’s presence in Jersey.
The position of the defendant companies
32. In deciding whether or not to require the
defendant companies to provide security for costs, as set out at paragraph
42(ii) of the Café de Lecq case, the principles to be applied are
those set out in A.E. Smith
& Son v L’Eau des Isles (Jersey) Limited [1999] JLR 319; those
principles were themselves recited at paragraph 13 of Café de Lecq
as follows:-
“13 It is helpful to set out in full the
relevant part of the judgment of Southwell, J.A. in the Court of Appeal (1999
JLR at 322–323):
“The principles of law
relevant in considering whether an order for security for costs should be made
by the courts of England and Wales were well-summarized by Peter Gibson, L.J.
in Keary Devs. Ltd. v. Tarmac Constr. Ltd. . . . ([1995] 3
All E.R. at 539–542). For the purposes of the present application I am
content to treat that statement of principles as generally suitable for
adoption in Jersey law, while reserving for future consideration some of the
details of this statement which may need some reconsideration in the different
circumstances in Jersey. That statement is too long to be quoted fully here,
and I summarize the principles as follows:
(a) The court has a complete
discretion whether to order security.
(b) 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.
(c) The court must balance, on the
one hand, the injustice to the plaintiff company if prevented from pursuing a
genuine claim by an order for security, and, on the other hand, the injustice
to the defendant if no security is ordered, the plaintiff’s claim fails
and the defendant is unable to recover its costs from the plaintiff. So the
court will seek not to allow the power to order security to be used oppressively
by stifling a genuine claim by an indigent company against a more prosperous
company, particularly when the circumstances underlying the claim and/or the
failure to meet the claim may have been the cause or a material cause of the
plaintiff company being indigent. The court will also seek not to be so
reluctant to order security that the impecunious plaintiff company can be
enabled to use its inability to pay costs as a means of putting unfair pressure
on the more prosperous defendant company.
(d) The court will broadly take
into account the prospects of success in the action, and the conduct of the
action so far. I mention here that it is common ground that the present
application is to be decided without dealing with the merits of the cases put
forward by either of the parties to the action.
(e) The court has a discretion to
order security of any amount, and need not order substantial security.
(f) If the plaintiff company
alleges that the effect of an order for security would be unfairly to stifle
its genuine claim, the court must be satisfied that, in all the circumstances,
the claim probably would be stifled. The test is one of probability, not
possibility.
(g) The stage of the action at
which security is sought is one aspect of the conduct of the action which the
court will take into account.
In summarizing the principles, I
have referred in principle (b) to a party being ‘deterred’ from
pursuing its claim and in principles (c) and (f) to a claim being
‘stifled.’ It seems to me to be important to appreciate that there
is a range of effects which an order for security may have on a plaintiff,
extending from, at one end, possible deterrence, through probable deterrence,
possible stifling, probable stifling to inevitable stifling at the other end of
the range. There are shades of grey, not black and white, dividing
‘deterrence’ from ‘stifling.’”
33. In applying these principles I start by
reference to the position of the second to fifth defendants. I agree with Advocate Hoy that the
defendant companies when looking at the 2008 and 2010 accounts exhibited to the
affidavit of Mr Flynn, or the 2014 accounts are balance sheet insolvent. The overall position of the Incat Group
is not explained at all even though each of the second to fifth defendants are
a 100% owned subsidiary of Incat Holdings Limited as pleaded at paragraph 21 of
the answer. The accounts provided
are also complex in that there are numerous intercompany loans the effect of
which is neither analysed nor explained by the first defendant and cannot be
followed from the accounts provided.
34. By reference to the accounts provided, the
defendant companies may also be cash flow insolvent but I do not have enough
information from the defendants to conclude that this is definitely the
position; despite losses being made the defendant companies have somehow
managed to trade since the matters that first gave rise to the litigation
between Incat and Luba, which form the background to the present proceedings
and which the defendants blame for their present financial difficulties. What is clear is that the financial
position of the defendant companies insofar as it has been revealed is
unhealthy.
35. Furthermore the information provided is lacking
in detail. There is no information
as to what assets are within the jurisdiction, how much is held in bank
accounts and where those bank accounts are located. Rather the first defendant only
describes at paragraph 7 of his affidavit the cash flow as being limited. The affidavit does not provide any
detail to explain these remarks other than to suggest the Viscount could
enforce costs orders against cash in Jersey. This statement is also made without any
detail about how much cash there is in Jersey or where it might be located.
36. The only information provided about assets
outside the jurisdiction is to suggest that there may be assets in Equatorial
Guinea. Although the first
defendant, at paragraph 8 of his affidavit, suggests there need not be any
concern about enforcing against such assets, he does not identify what assets
there are in Equatorial Guinea, or indeed anywhere else, what he considers
their value to be or how realisable they might be. If the plaintiffs were successful in
their claim and the defence or counterclaim failed, the likely method of
enforcement would be either placing the defendant companies’ en désastre or into some form of
compulsory liquidation or winding up.
Whether the Viscount was acting or a liquidator was appointed, I
consider it realistic to assume that it would not be straightforward for either
to have their appointment recognised or to seize and liquidate assets outside
Jersey. As the first defendant
himself recognises at paragraph 11 of his affidavit, the defendant companies
trade in a relatively small global market and bad publicity would be fatal to
the business of each of the companies. A sale of any assets following any
désastre or liquidation would therefore likely to be of interest to only
a few buyers, if at all, and probably at a significant discount compared to
their value if the defendant companies’ businesses were sold as a going
concern.
37. The position I am left with therefore is that
the defendants have only provided limited financial information. In the Orange Capital case at
paragraph 23 when considering this issue when no accounts had been provided I
stated as follows:-
“23. Just as in Goldtron, no published accounts have
been produced, nothing is known about the financial position of the plaintiffs
and the plaintiffs have not adduced any evidence to show that they are willing
or able to meet any adverse costs order.
All I was told was that if security were ordered the plaintiffs would
pay the relevant amount into Court.
I was not given an explanation about the nature of the plaintiffs’
businesses beyond what is contained in the order of justice; I have not been
shown any balance sheet or other accounts, or any evidence showing the nature,
location or substance of their assets.”
38. While I have been provided with more
information by the defendants than the plaintiffs in Orange Capital case
chose to provide, the position is not much more advanced. I do not have the overall financial
position of the Incat Group.
Evidence has not been adduced to show that the defendants are able to
meet any adverse costs order. I
have simply received the benefit of a vague statement that the defendants will
endeavour to pay any costs order without any information to show that they
could do so. The arguments advanced
implying that it would be straightforward for the Viscount or a liquidator to
enforce any costs order against the defendants are far from convincing. Finally I have not been given any
evidence showing the nature, location or substance of the assets of the second
to fifth defendants.
39. The view I have reached therefore is that the
financial position of the defendant companies is such that, without security
for costs being ordered, the plaintiffs would at least face significant
difficulty in enforcing any costs order and at worst would find themselves
facing defendants who were insolvent on any basis and who either were placed en désastre or in
liquidation. Subject to the
question of stifling, this position justifies security for costs being ordered.
40. In expressing this view I accept that the
plaintiffs already face a risk that they may not be able to recover any fees
awarded in their favour. However,
the acceptance of that risk does not mean that the plaintiffs are not entitled
to seek security for costs in respect of the counterclaim. Merely because the plaintiffs may face
difficulties in enforcing a judgment in their favour, does not mean that the
plaintiffs must accept the additional risk of not being able to enforce a cost
order in their favour in response to an unsuccessful allegation of professional
negligence.
41. In respect of the invitation that I should
allow the second to fifth defendants more time, I return to my findings that it
is clear that the first defendant under whose ‘stewardship’ the defendant companies operate, has been
advised about the principles of a security for costs application. In my view therefore the decision not to
provide any further information beyond that produced was one that was
deliberate. The first defendant
from his affidavit clearly understands the applicable test and must be taken to
be aware of the level of detail required in respect of the defendant companies
against whom security is sought. As
the person with ‘stewardship’
of the defendant companies, and with the required understanding of what is
required, he has chosen not to provide that information. I do not therefore consider it
appropriate to allow more time to do so.
42. Whether I should order security for costs
against the defendant companies where their position is not healthy requires me
also to address the statements of the first defendant that the counterclaim
would probably be stifled if security for costs were ordered in the amount
sought.
43. In evaluating an assertion of stifling and
weighing it in the balance, as I am required to do by the A.E Smith &
Son case, the final paragraph of the extract of A.E. Smith & Son
cited above notes the importance of appreciating that there is a range of
effects which an order for security for costs may have “extending from, at one
end, possible deterrence, through probable deterrence, possible stifling,
probable stifling, to inevitable stifling at the other end of the
range.” There are shades of
grey, not black and white dividing ‘deterrence’ from
‘stifling’.”
44. In my view, in view of the financial position
of the defendant companies as it has been explained, ordering security would
probably deter if not possibly stifle the counterclaim in this action. The defendant companies may not be far
from being unable to pay their debts as they fall due. Their financial position as best I can
understand is unhealthy. However,
despite this, I am not satisfied that the claim would probably be stifled. This is because of the lack of
information provided by the first defendant either about his own financial
position, whether in Jersey or the financial position of the Incat Group as a
whole and what assets each of the defendant companies may have in Jersey or
elsewhere and their value. The
Incat Group has managed to continue for a number of years notwithstanding the
apparent financial difficulties its accounts appear to reveal and has some cash
flow albeit unspecified. The income
of the fifth defendant by reference to the latest accounts also runs into seven
figures (in £ sterling). In
reaching this view, I have also taken into account the fact that, it is not
appropriate to order the full amount of the security sought as Advocate Hoy
conceded and that in assessing quantum some discount should be applied for
amounts irrecoverable on taxation.
45. In relation to quantum the overall amount of
security sought in round terms was £122,863. Reducing this sum by approximately one
third to reflect the defences raised by the first defendant alone and in
respect of all the defendants’ challenge to quantum, leaves a figure of
£80,000. Having considered
the amounts already incurred and the amounts claimed, while I consider that
some amounts will be disallowed on taxation, I do not regard the amounts
claimed as manifestly excessive. I
therefore consider that on a taxation, of the costs claimed, if they are
incurred, around £60,000 would be recovered.
46. In deciding what security to order, I have also
reminded myself of the words of the Court of Appeal in Leeds United v
Association Football Club Limited, The Phone in Trading Post, t/a Admatch [2009]
JLR 186 at paragraph 20 (cited in the Orange Capital decision at
paragraph 15) and the fact that ordering security can have implications for
cash flow which are likely to be significant. In this case, given what has been
revealed about the financial position of the defendant companies, ordering
security for costs of more than an nominal amount will in my view have
implications for the cash flow of the defendant companies even though I am not
satisfied that their claims will probably be stifled. I consider it is appropriate to take
this into account in reaching a view as to what security should be ordered.
47. In my view the appropriate amount of security
to be ordered taking all the information provided into account is £50,000
to balance injustice to the plaintiffs, if security is not ordered on the one
hand, and injustice to the defendants on the other if too much security is
requested, for all the reasons I have given. This is the amount of security I
therefore order to be provided by the second to fifth defendants. This sum is less than half the amount
requested by the plaintiffs and while it may not be easy for the defendants to
raise this sum, the Incat Group does have some cash flow. The first defendant also does have some
equity in the property he owns through a company; he has only stated that this
equity was not enough to meet the sum sought. He did not say that the equity available
might not be sufficient to meet or help meet a lesser sum.
48. In reaching my conclusion, I have not given any
weight to the merits of the counterclaim and the contentions of Advocate Hoy
that any counterclaim was contrary to the findings of Commissioner Clyde-Smith
referred to at paragraph 14(h) above.
This is because what is to be explored at trial is what discussions took
place between the plaintiffs in particular Advocates Young and Goulborn on the
one hand and the first defendant on the other, in relation to the allegations
of negligence. In other words it
remains to be considered what advice was given, what instructions were given
(as well as by whom) and what risks were assumed in response to the advice
given. The allegations made at
paragraphs 40 to 48 of the answer and counterclaim involve allegations of
negligent conduct and failing to advise even in respect of matters that were
considered by the judgment of the Royal Court in 2008 in respect of the
position of Lonrho. In my view
therefore they are matters for trial and in ordering security I have reached my
decision on the assumption in the defendants’ favour that both the
counterclaim and the defence to the counterclaim are arguable and I have not
accepted that the plaintiffs in defending the counterclaim have strong
prospects of success. I did not
have enough information before me to reach such a conclusion.
Conclusion
49. For all the reasons set out in this judgment I
therefore order the defendants to pay the plaintiffs security for costs in the
sum of £50,000. When judgment
is handed down I will hear argument on the time by which such security has to
be provided as well as arguments on costs.
Authorities
Incat
& Ors v Luba Freeport Limited [2008] JRC 140.
Jubilee Scaffolding Limited v Mark Amy
Limited 1993/167.
Home
Farm Developments v Le Sueur [2014] JRC 131.
Orange
Capital (Proprietary) Limited and Ors v Standard Bank Jersey Limited [2013]
JRC 221A.
Café
de Lecq v Rossborough (Insurance Brokers) Limited [2011] JLR 31.
A.E.
Smith & Son v L’Eau des Isles (Jersey) Limited [1999] JLR 319.
Leeds
United v Association Football Club Limited, The Phone in Trading Post, t/a
Admatch [2009] JLR 186.