Master Fontaine :
- This is an application by the Defendant for security for costs in the sum of £50,000 up to the hearing of a pre-trial review in this claim. Both parties rely on a number of witness statements as follows:
Claimant:
First witness statement of Paul Graham Nicholls dated 13 January 2011.
Second witness statement of Antony Charles Verinder dated 12 January 2011.
First witness statement of Colin Lovell Verinder dated 12 January 2011.
First witness statement of Joy Pryor dated 12 January 2011.
Second witness statement of Paul Graham Nicholls dated 17 January 2011.
First affidavit of Antony Charles Verinder dated 14 March 2011.
Fourth witness statement of Paul Graham Nicholls dated 14 March 2011.
Defendant:
Second witness statement of John Montague Woosnam dated 19 October 2010.
Third Witness statement of John Montague Woosnam dated 7 March 2011.
- Following the hearing, when judgment was reserved, I gave permission for the parties to serve and file further evidence, and that is also relied upon, as follows:
Claimant
Second and Third witness statements of Joy Pryor dated 30 March 2011 and 11 May 2011
Second witness statement of Colin Verinder dated 11 May 2011
Defendant
Fourth witness statement of John Montague Woosnam dated 20 April 2011
- The Claimant concedes in this application that the jurisdictional threshold for an application under CPR 25.13 is met, namely that the Claimant is a company and there is reason to believe that it will be unable to pay the Defendant's costs if ordered to do so. The Claimant submits that the discretion of the court should be exercised not to make an order for security for costs on the following grounds:
i) On balance of probabilities the Claimant has demonstrated by evidence that the claim will be stifled if security is ordered for more than the sum of £1,000.
ii) That the Claimant's impecuniosity is a result of the Defendant's breach of contract which is the subject of these proceedings.
iii) The Claimant has good prospects of success in the claim.
iv) Under the court's exercise of the overriding objective the discretion should not be exercised taking into account:
a) The relative financial positions of the parties;
b) The need to deal with the case fairly, such that the interests of justice require that the disadvantage to the Claimant of the making of an order for security outweighs the disadvantage to the Defendant in not making such an order.
- The Defendant submits that the court's discretion should be exercised in favour of making an order because:
i) There are lacunae in the evidence of the Claimant with regard to the financial position of the company and its directors such that the court cannot be satisfied that an order for security would stifle the claim.
ii) The Defendant's failure to proceed with the contract which is the subject of the claim was not the cause of the Claimant's impecuniosity. Rather, the Claimant company was impecunious before the termination of the contract and has continued to be so.
iii) The Claimant's belief in its prospects of success are not borne out by the fact that the proceedings were issued in 2009 and the claim has not yet reached close of pleadings, because there have been a number of drafts of the particulars of claim, and two orders to amend the particulars of claim, which suggests that the Claimant's faith in its own claim is uncertain.
iv) The overriding objective is in favour of security being granted.
Factual Background
- Both parties are and were at all times limited companies carrying on the business of provision of internet services. Mr Colin Verinder and Mr Antony Verinder are father and son, and shareholders of the Claimant. Mr Colin Verinder is a director of the Claimant. Mr Antony Verinder is the Company Secretary and is also a solicitor, employed as an associate solicitor at a London firm. The parties, and the shareholders of the Claimant, entered into a contract in writing entitled "Investment and Shareholders Agreement" dated 8 February 2007 ("the contract") whereby the Defendant agreed, in exchange for a 40% shareholding in the Claimant company, to provide the sum of £50,000, by two payments; £15,000 on signature of the contract and the opening of a valid bank account, and a further £35,000 on or before 28 February 2007. The Defendant also agreed to provide business support to the company as outlined in Clause 6 of the contract. Clause 7 sets out conditions precedent to be satisfied before the Defendant was obliged to make the investment. The Claimant gave warranties in respect of a business plan which it had prepared, referred to in Clause 8 and attached to the contract. It is not in dispute that the Defendant failed to pay either of the sums specified under the contract nor any of the services specified in Clause 6 ("the support services").
- The Claimant's claim for loss and damage is divided into two heads, namely "expectation loss" and "reliance loss". Under the first head of damages it is claimed that if the contract had been complied with, namely by the provision of the sum of £50,000 and the support services, the Claimant would have realised a net profit of over £3 million by 31 January 2009, in accordance with the trading forecast set out in the business plan. Instead it made a net loss during the same period of just under £300,000. The claim for damages is therefore based on the loss of a chance of being able to better its net profits by the sum of c. £3.5 million. The claim for reliance losses relates to sums expended or liabilities incurred by the Claimant based upon its reasonable reliance on the Defendant's performance of the contract. In particular, the Claimant entered into service contracts with directors and an employment contract with a website designer, under which it incurred liabilities.
- The defence to the claim, primarily, is that the Claimant failed to comply with conditions precedent to the contract in Clauses 7 and 3.2.1. There is also a denial that the Claimant has correctly specified the extent of the obligations owed by the Defendant under the contract pursuant to Clause 6.
The Law
- It is clear from the wording of CPR 25.13 that the court's power to make an order for security for costs under rule 25.12 is discretionary. Rule 25.13(1)(a) provides that the court may only make such an order if it is satisfied, having regard to all the circumstances of the case, that it is just to make the order. The following authorities were referred to by the parties, and I have summarised the propositions of law which may be taken from those authorities:
i) Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All E.R. 534 at 539. The principles for the approach that the court ought to adopt in such an application are:
(1) That the court has complete discretion whether to order security and will act in the light of all the relevant circumstances (Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] 2 All E.R. 273).
(2) The possibility or probability that the claimant company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security (Okotcha v Voest Alpine Intertrading GmbH [1993] BCLC 474 at 479 per Bingham LJ).
(3) The court must carry out a balancing exercise weighing the injustice to the claimant if prevented from pursuing a proper claim for an order for security, against the injustice to the defendant if no security is ordered and at trial the claimant's claim fails and the defendant is unable to recover costs it has incurred in the 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 Claimant's impecuniosity (Farrow v Lacy, Hartland & Co (1885) 28 Ch Div 482 at 485 per Bowen LJ). But the court 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 (Pearson v Naydler [1977] 3 All E.R. 531 at 537).
(4) The court will have regard to the claimant company's prospects of success but it will 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 KG v Porzelack (UK) Ltd [1987] 1 All E.R. 1074 at 177 per Brown-Wilkinson V-C).
(5) The court in considering the amount of security that might be ordered will bear in mind that it can order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal amount; it is not bound to make an order for a substantial amount (Roburn Construction Ltd v William Irvine (South) and Co Ltd [1991] BCC 726).
(6) Before the court refuses to order security on the grounds that it would unfairly stifle a valid claim, the court must be satisfied that, in all circumstances, it is probable that the claim would be stifled. The court should consider not only whether the claimant company could 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. It is for the claimant to satisfy the court that it would be prevented by an order for security from continuing the litigation (Flender-Werft AG v Aegean Maritime Ltd [1992] Lloyd's Rep 27).
ii) Newman v Wenden Properties Ltd [2007] EWHC 336 (TCC) at [9] before HHJ Coulson QC. The principles applicable to considering whether an order for security would stifle a genuine claim are:
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).
b) Before the court refuses to order security on the grounds that it would unfairly stifle a valid claim, the court must be satisfied that in all circumstances it is probable that the claim would be stifled (Keary Developments).
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 1 2000 Court of Appeal (unreported)).
iii) Al-Koronky v Time Life Entertainment Group Ltd [2006] EWCA Civ 1123 at [27] – [28] and [30] – [31].
(1) The court must scrutinise the evidence of the Claimant's means "with a critical eye and ..note unexplained gaps in the information which the claimant volunteers or in the documentary support for it".
(2) If the court is not satisfied that a full account of the resources available to the claimant the court in its discretion can provide its best estimate of what the claimant, "despite having been insufficiently candid", can afford, by way of security.
(3) There is an obligation to read CPR 25.13 in conformity with Article 6 of the European Convention on Human Rights by virtue of section 3(1) of the Human Rights Act 1998. This obligation is met by the principle that the court may not fix security in what it knows to be an unaffordable amount.
(4) There is a clear difference between incurring a substantial risk, in the overall interests of justice, that a claimant will not be able to raise the sum required as security, and setting a sum in the knowledge that it cannot do so. The latter is tantamount to striking out the claim and requires the same process and justification as any other strike-out. The former is the striking of a balance of the kind described in the authorities, within the Convention paradigms. The defendant also has entitlements under Article 6, including the right not to have their access to a court rendered prohibitive by the prospect of irrecoverable costs, or an entitlement to have the claimant's access limited by relevant and proportionate conditions.
iv) Michael Phillips Architects Ltd v Riklin [2010] EWHC 834 (TCC) Akenhead J at [18] as to whether ATE insurance can provide adequate or effective security for the defending party's costs:
a) There is no reason in principle why an ATE insurance policy which covers the claimant's liability to pay the defendant's costs, subject to its terms, could not provide some element of security for the defendant's costs. It can provide sufficient protection.
b) It will be a rare case where the ATE insurance policy can provide as good security as a payment into court or a bank bond or guarantee. That will be, amongst other reasons, because insurance policies are voidable by the insurers and subject to cancellation for many reasons, none of which are in the control or responsibility of the defendant, because the promise to pay under the policy will be to the claimant.
c) It is necessary where reliance is placed by a claimant on an ATE insurance policy to resist or limit a security for costs application for it to be demonstrated that it actually does provide some security. Put another way, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant's costs.
d) There is no reason in principle why the amount fixed by a security for costs order could not be somewhat reduced to take into account any realistic probability that the ATE insurance would cover the costs of the defendant.
The Issues
(A) Whether an order for security will stifle the claim
- The Claimant provides evidence of the company accounts up to the end of March 2010, and the company bank statements with Natwest Bank from 3 December 2010 to 4 March 2011. The bank statements show an overdrawn balance of £20.06 as at 4 March 2011. Mr Antony Verinder gives evidence in his affidavit at paragraph 6A that there is now a balance of £979.24 standing to the Claimant's credit at the date of the affidavit (14 March 2011). Mr Antony Verinder gives evidence that no management accounts are prepared by the Claimant company.
- Mr Antony Verinder gives evidence as to his and his father's assets. He exhibits bank statements relating to his own Natwest account from 10 December 2010 to 10 January 2011 showing an overdraft of just over £1,000, his Barclays bank statement from 12 January 2011 to 11 February 2011, showing an overdraft of £25.68, and his Natwest Visa credit card account dated 9 February 2011 showing a debit balance of £4,702.89. He exhibits other accounts, savings and ISA accounts showing a balance of some £300 in total. He exhibits his parents' joint Barclays bank account statements from 13 January 2011 to 12 February 2011 showing a closing balance of £18.80 and an opening balance of an overdraft.
- Mr Antony Verinder also gives evidence in relation to two assets available to his family, namely property at 24 Brownhill Drive, Padgate, and his maternal grandmother's estate. In paragraph 13 of his witness statement he explains that the property at Brownhill Drive is a property owned and lived in by his parents, and that because of his father's dire financial straits because he was not receiving the salary that he was due under his service contract with the Claimant he was unable to meet mortgage payments and the mortgagees had applied for possession of the property. To avoid a possession order in favour of the mortgagees, Mr Antony Verinder purchased that property from his parents for a sum of £180,000, giving a net sale price of £161,970, from which deductions were made for redemption of the first mortgage and additional charges and legal fees, leaving a total due to his parents of £40,923. He explains that his parents gave him by way of deed the value of 10% of the property before the purchase in order for him to obtain a mortgage because they did not have the necessary money for the deposit. He says that the sale proceeds of £40,923 were received by his parents over two and a half years ago and the money was used for their living expenses and to pay off substantial personal debt, incurred because his father had not received sums due to him under his service contract. He says that he has been informed by his father that the money therefore no longer exists. He further gives evidence that following consultation with an online valuation provider, "Zoopla", the property is currently valued at £159,310, less than the sum of £160,622.60 owed upon the mortgage so that he would be unable to recover any funds even if the property were to be sold.
- With regard to his grandmother's estate, he gives evidence at paragraph 15 that his maternal grandmother Bridget died on 22 December 2008. He is informed by his mother that other than insignificant cash sums his grandmother's estate consisted of a small property worth less than £90,000, left to his mother and his uncle in joint ownership. The property has been up for sale since shortly after his grandmother's death and there has been little interest and it remains unsold. He further says that even if the property was sold there is no reason why his mother would be willing to offer monies to the Claimant by way of a loan, as she is not a director, shareholder or backer of the company.
- Mr Antony Verinder gives evidence (paragraph 10 of his affidavit) that the present litigation is funded primarily by way of a CFA in respect of the claimant's instruction of its previous solicitors, Frank Howard, and its current solicitors, Nicholls Law. The Claimant's counsel is also acting under a CFA. The issue fee for the claim and the allocation fee were paid by loans advanced by Mr Colin Verinder. A sum of £1,500 was paid to the previous solicitors to cover the costs of instructing counsel to amend the particulars of claim, but when counsel agreed to act on a CFA this sum was transferred to the current solicitors, Nicholls Law. Of this sum, the sum of £424.80 has been used by way of disbursements and a sum of £1,000 has been repaid to the Claimant, part of which constitutes the sum of £979.24, being the Claimant's current account balance. Further, Mr Antony Verinder sent a sum of £218.45 to Nicholls Law on behalf of his father to be used for disbursements, on 31 January 2011.
- With regard to future disbursements, the Claimants seek to rely only on one expert witness, namely a viability expert, in respect of the likelihood of the business plan succeeding. An expert has been identified who is a former employee of PriceWaterhouse Coopers and a venture capitalist who has indicated that he would in principle be prepared to appear as the Claimant's expert witness and that his funding "would not be expensive" as he has considerable expertise in assessing the viability of start-up ventures and is keen to have the experience.
- The Defendant's position, set out in submissions and in the witness statement of Mr Woosnam, is that a number of areas of uncertainty remain in respect of the evidence submitted by the Claimant as to its financial position, in particular with regard to the fact that there are no management accounts for the company, it appears from the evidence that the company may be trading whilst insolvent and there is no evidence that the income of the Claimant was going into the bank accounts that the Claimant had disclosed. It is submitted that there is no proper explanation as to how the Claimant will fund the litigation in the future as the expert will not be paid by the ATE policy, and if a mediator is to be instructed by the parties, the mediator will not be paid by the ATE policy. It is submitted that the court should conclude that the Claimant must have a substantial cash fund to enable the litigation to be funded.
(B) Whether the claim has a good prospect of success
- It is accepted by the authorities that the court cannot go into detail as to the merits of the claim, but it is a relevant consideration as to whether the claim has a reasonably good prospect of success. The Defendant does not suggest that there are not reasonable prospects of success for the purposes of this application. I am satisfied that there are reasonable prospects of success on the basis of the pleaded cases and the evidence seen so far. The breaches of contract are denied, and the defence relies on alleged non-compliance by the Claimant with various conditions precedent in paragraph 16. The Claimant submits that the defence is "flimsy" and "makeweight". Whilst not being in a position to reach a view as to whether I agree with that submission, I accept that the claim appears to be a strong one and that the primary defence relied upon in paragraph 16 is far from being overwhelming.
- I note also that the Claimant's ATE insurers assessed the Claimant's prospects of success at more than 60%, their minimum requirement (Pryor No 2, Paragraph 9) and that the Claimant's former solicitors, Frank Howard, evaluated the Claimant's prospects of success at 75% (Exhibit CLV2, page 1).
- With regard to this issue the Defendant has relied on emails from Mr Antony Verinder which the Claimant alleges are privileged because in contemplation of litigation. I have reached the view, having seen those e-mails, that they are privileged because they were made in contemplation of this litigation.
- The Defendant also refers to the fact that it has taken the Claimants from 2007 to late 2009 before embarking on proceedings against the Defendant, and that the particulars of claim have changed a number of times so that the Claimant appears to be uncertain of the claim it wishes to advance.
- It is apparent from the evidence that the delay in commencing proceedings, (which were issued in any event well within the limitation period), was because of problems in funding such litigation. The amendments to the particulars of claim do not, in my view, reflect adversely on the merits of the claim. I cannot form any view as to the likely quantum of the claim as the major part of this will be the expectation losses claim, and subject to expert evidence.
(C) Whether the Defendant caused the Claimant's impecuniosity
- The Defendant denies that this was the cause of the Claimant's impecuniosity. It says that the situation is analogous to the position in the case of Newman v Wenden Properties and that the judgment of HHJ Coulson QC (as he then was) at paragraph 20 is referable to this situation. It is submitted that the Claimant was impecunious before the contract was entered into and it is still impecunious and that the present impecuniosity was not caused by the Defendant because the Claimant never had any real assets and was always in financial trouble.
- The Claimant submits that the failure of the Defendant to provide the sum of £50,000 promised under the contract, and just as importantly, and perhaps more importantly, the services promised in Clause 6 of the contract, has led to the financial difficulties that have caused it to be impecunious. The Claimant submits that the case of Newman is not a fair comparison. The Defendant contracted to provide financing and also substantial business support services. The funding not having been provided, Mr Colin Verinder and Mr Antony Verinder have had to invest substantial sums of their own into the Claimant company. There is exhibited a letter from Mr A.M. Bothey (the company's independent accountant/auditor) to Mr Colin Verinder dated 11 January 2011 which confirms that Mr Colin Verinder is owed a sum of £28,010 from the company to the year 31 March 2010, and that Mr Antony Verinder is owed a total of £25,461 for the same year. Mr Bothey states that the figures will be included in the company accounts for the year ending 31 March 2011. They are not included in the 2010 account. Mr Bothey states
"these respective debts have largely arisen through funds that both you and Antony have loaned to the company in order to keep the business running, following the failure by Billscutter Ltd to provide the investment capital and infrastructure that was required by the company to implement its business plan. The financial contributions made have been expended on various things integral to the company's business, such as fuel, wages (in particular Andrew Gough), commission payments, utilities, repairs and fees of suppliers. You have both transferred the money since 31 March 2010 which will need to be quantified."
- Accordingly, it is submitted that the lack of funds available from either Mr Colin Verinder or Mr Antony Verinder to fund litigation has been directly caused by the need to invest these capital sums which would not have been required had the Defendant invested the sum of £50,000 and provided the support services which they contracted to do. Further, without the investment from the Defendant the Claimant is a less attractive proposition to any other potential investor because of the level of debt which it did not have at the time when the contract was entered into, in particular the indebtedness to the directors as a result of their investments.
(D) The relevance of the ATE insurance
- The Claimant relies on the first witness statement of Joy Pryor. Ms Pryor is an underwriter with First Class Legal (IS) Limited, a provider of after the event insurance and legal funding. She confirms in her witness statement that ATE insurance has been arranged for the Claimant by her company with a level of indemnity of £65,000. She attaches a copy of the policy wording and she sets out her company's approach towards the cancellation of cover, which are the usual matters where any insurer would not be prepared to indemnify. She says that top-up insurance can be given to increase the level of cover should the level of indemnity be reached. She says that "the cover provided by the ATE policy therefore would provide security in most cases provided the policy terms and conditions had been complied with".
- On the date of hearing, following my questions, confirmation was obtained by the Claimant's solicitors by email that insurance cover had been arranged by the same insurers in respect of the premium for the insurance cover in the sum of £32,000. That was a matter of concern to the Defendant because the premium was not payable until the end of the case, and it was anticipated that it would be funded out of recoveries made from the claim, whereas if the claim was not successful, there would not be funds to pay the premium.
- The Claimant submits that the facts of the case of Phillips (see above) are very different from the present circumstances, that being a defamation claim, so that if the claimant had lost the case it would indicate that he had made misrepresentations about his case to his insurers.
- The Defendant relies on the conclusion in Phillips where the judge took the view that the ATE insurance in that case did not provide sufficient security to the Defendant, and the quotation in that judgment (at [17]) from the judgment of Longmore L.J. in Belco Trading Co v Kondo [2008] EWCA Civ 205 at [5]:
"It would, in my judgment, be most unjust to the Defendants to prevent them from pointing out that the policy in fact gives them much less security than the traditional form of security for costs."
- I take into account these submissions in reaching my final conclusion, below. I have also been assisted by the further evidence of Ms Pryor, served after the hearing.
(E) The exercise of the court's discretion and the overriding objective
- It is submitted on behalf of the Claimant that the court's discretion should be exercised not to grant the Defendant's application when taking into account the overriding objective in respect of the following matters:
i) The relative financial positions of the parties
The Claimant company is a small fledgling company struggling financially. The Defendant is a substantial company with a projected turnover of £4.5 million. When considering the prejudice to the Claimant if security for costs were ordered, and the prejudice to the Defendant if security for costs were not ordered, then the balance must be in favour of not ordering security, because the Defendant company would be likely to be able to bear the costs risks, such as they are with the ATE insurance in place, whereas the Claimant would not be able to fund a substantial payment for security for costs.
ii) The Defendant is a large and sophisticated company which chose to walk away from an agreement it had entered into, leaving the Claimant company in substantial difficulties.
iii) Only the balance sheet of the Defendant's accounts is provided and not a profit and loss account. The balance sheet suggests that the company must have substantial funds available to it from its backers, a very different position to that of the Claimant.
iv) The Defendant's position on costs is substantially protected because there is ATE insurance in place.
- The Defendant submits that the Claimant's submissions with regard to its financial situation have been made without reference to the company accounts of the Claimant. I was referred at the hearing to the notes to the account which state:
"these conditions…indicate the existence of a material uncertainty which may cast about the company's ability to continue as a going concern" and
"the company is also owed £83,690 from its directors. If the directors are unable to repay this amount, it would put the company's ability to continue to trade as a going concern in significant doubt."
Despite those notes, the accounts were prepared on a going concern basis.
- The most recent filed accounts for the year ending 31 March 2010 were provided after the hearing, and are referred to at Paragraphs 19 and 20 of the fourth witness statement of Mr Woosnam. These show a net loss of £35,221 and an increase in net current liabilites from £9,861 to £71,371, and a decrease in shareholders' funds from £59,693 to £15,121.
- Evidence is also provided by Mr Woosnam that the Defendant suffered a poor trading year last year (which I assume to mean the year ending 31 March 2011) as a result of which it was unable to pay corporation tax, PAYE and VAT liabilities that had fallen due on years 2008/09 and 2009/10, and that it currently owes approximately £148,000, which it is discharging at the rate of £6500 per month. It also sustained irrecoverable legal fees in an unsuccessful unfair dismissal claim of £14,000. Thus it is submitted that it would be a heavy burden to the Defendant if a costs order in its favour is not paid.
- The Defendant relies on the case of Phillips in particular at page 5, paragraph 13.3, where the judgment of Peter Gibson LJ in Keary is quoted:
"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 for security. Against that, it must weigh the injustice to the Defendant if no security is ordered and at a trial the plaintiff's claim fails and the defendant finds himself unable to recover from the plaintiff the costs which had been incurred by him in his 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 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…".
- The Defendant also refers the court to the Claimant's reluctance to provide details of the ATE policy which, it submits, appears to be a deliberate suppression of that evidence contrary to the requirements of the Costs Practice Direction paragraph 19.32(b) and 19.41 and 3.
- The Defendant also submits that the Claimant's conduct has been unhelpful to the court in that it produced its evidence for the hearing in January, which was adjourned to this hearing, at the last minute and in respect of the ATE insurance complete evidence has not been provided until the day of the hearing. Further, the Claimant has not responded properly to correspondence about its assets in relation to questions posed before the application was issued. In particular, a letter dated 18 February 2011 asking detailed questions on the Claimant's accounts for the year ending 31 March 2010 was not answered and the first answer to the questions posed has come at today's hearing.
- Further, there was no information provided about the family assets before January 2011. There was no information from Mr Colin Verinder about how the sum of £40,923 that was released has been used up. The bank account of Mrs Gaynor Verinder has not been provided. It is submitted that there is no information as to how it is intended that the expert and any mediator will be paid.
- Primarily, the Defendant relies upon the fact that the Claimant is insolvent and appears from the financial information provided to be at risk of going into liquidation. It appears that it may not be in a position to pay its debts when they fall due, which is the definition of whether a company can be said to be a going concern. There is a real risk that Mr Gerald Carabini, a former director/employee of the company who has a claim under his service contract for some £60,000, will bring a claim upon which he would be entitled to bring a winding-up petition against the company, which would leave the Defendant unsecured for the costs for the claim.
CONCLUSION
Whether the granting of security would stifle the claim
- I have concluded that the evidence does support the Claimant's case that the litigation would be stifled if an order for security for costs were to be made. I consider that Mr Antony Verinder's most recent affidavit deals with the major part of the gaps in the previous evidence. I am satisfied that there is only a fund of just over £900 available to the Claimant company and that neither of the directors have funds or access to financing which would enable them to fund security for costs. I reach that view on the balance of probabilities based on the evidence before me. I do not consider that this is a case similar to that dealt with the Court of Appeal in Al-Koronky, where there are substantial lacunae in the evidence of the funds available to the company. Where there are gaps in the evidence, such as the lack of any accounts from 31 March 2010, the other evidence provided has been sufficient for me to take a view as to what the Claimant can afford, if anything, for security for costs. Further, I take account of the requirements of Article 6 of the European Convention on Human Rights, with reference to the guidance in paragraph 30 of Al-Koronky, and take the view that if a sum of more than the sum of £1,000 offered were to be ordered for security for costs, then this would breach the Claimant's Article 6 rights of access to a fair hearing.
Whether the claim has a good prospect of success
- I have concluded (Paragraphs 16-20 above) that the claim has a good prospect of success.
Whether the Defendant caused the Claimant's impecuniosity
- I accept the Claimant's submission that this is a different situation from that in Newman. There is evidence that funds have been invested into the company by Mr Colin Verinder and Mr Antony Verinder which have left them unable to provide further funds which might have been available for security for costs. The evidence supports the submission that such investment is likely not to have been required had the investment of £50,000 from the Defendant been forthcoming, as the contract does not provide for any such investment to be made from directors or shareholders. I have therefore concluded that the Defendant has been responsible for the current financial position of the Claimant, such that it is unable to provide security in the sum sought, or any sum other than the funds held in its bank account.
The Exercise of Discretion
- I do not consider that the court's discretion should be exercised to order security for costs against the Claimant, applying the guidance of the authorities referred to and the overriding objective, for the reasons that follow.
- I consider, on the basis of the evidence, that the Claimant would be unable to pay any amount of security either using its own assets or those of its directors or any other person, and that a genuine claim would be stifled if an order were to be made. I accept that there are some lacunae in the financial information, namely that only bank statements for the period 31 March 2010 to date have been provided and not company accounts; and the director's loans due to Mr Colin Verinder and Mr Antony Verinder are not included in the 2010 accounts. Full information as to creditors has not been provided. Nevertheless, it is abundantly clear that the company is run on a shoestring and that neither Mr Colin Verinder nor Mr Antony Verinder has funds or access to funding to provide security for costs. There is evidence from the company auditor that funds have been invested in the Claimant by Mr Colin Verinder and Mr Antony Verinder (see Paragraph 23 above). I do not consider that, if it were the case, the fact that Mrs Verinder is unable or unwilling to provide funding for security for costs would be likely to weigh heavily in the balance of considerations. In any event evidence has been provided about Mrs Verinder's expectations in relation to her mother's estate, and her joint bank account statement has been provided. Insofar as there are lacunae about the information provided, I have made an assessment as to what, if any, funds could be provided by the Claimant. I have concluded that the only sum available is the sum of just under £1,000 held in the Claimant's bank account, which is, in any event, likely to be required for payment of disbursements in this litigation outside the CFA.
- I am assisted by the judgment of Akenhead J in Phillips at paragraph 18 with regard to the ATE insurance in place. Although the totality of this evidence has come later in the day than it should have done, it seems to me to be sufficient assurance to the Defendant that it is unlikely to be exposed if a costs order is made in its favour. Although such insurance can rarely, if ever, provide the same level of security as a payment into court or bank guarantee, it can provide a high degree of protection and I consider on the evidence that it does so in this case. I reach this conclusion on the basis of the following:
i) Ms Pryor's evidence in relation to the policy.
ii) The wording of the policy does not seem to me to be unreasonable in any way, and no particular criticisms of the wording of the policy have been made by the Defendant.
iii) The level of cover is adequate for present purposes.
iv) Evidence has been provided as to how the premium is insured.
- Even taking into account the submissions in respect of the most recent filed accounts of the Defendant it is clear that the Defendant is a company that operates on a much more substantial level than the Claimant. I consider that weighing the balance of prejudice to the Claimant if an order were to be made, and to the Defendant if an order is not to be made, would favour not making an order, given the relative financial positions of the parties, and the fact that ATE insurance is in place.
- I do not accept that the criticisms of the Claimant's conduct are made out to a level that would affect the exercise of the court's discretion. In particular, although the failure of the Claimants' solicitors to provide the required details of the CFA insurance were extremely unfortunate, it was apparent to me, when I dealt with the application for relief from sanction, that such failure was in fact caused by the solicitors being unaware of the relevant court rule and practice direction, surprising though that may be for solicitors conducting litigation, rather than by any desire to conceal information. Although it is unfortunate that the complete information about the operation of the ATE insurance was provided late in the day, it has now been provided and I have found Ms Pryor's evidence helpful.
- Having concluded that a genuine claim would be stifled by the ordering of security, it would not be in the interests of justice to make such an order, and to do so would, in my view, be in breach of the Claimant's Article 6 rights of access to justice. In this regard I also consider that the principle enunciated by the Court of Appeal in Aquilla Design at pages 138-9, as summarised by Coulson J. in Newman at para. 9 (a) (see Paragraph 8(ii) (a) above), are of relevance to this application, in relation to the possibility that the ATE policy may not cover all or some of the Defendant's costs if the defence is successful.
- Accordingly I will dismiss the application.
