Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 29
A640/02	OPINION OF LORD DRUMMOND YOUNG in the cause GAELIC SEAFOODS (IRELAND) LIMITED Pursuers; against EWOS LIMITED Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: Cormack, Solicitor-advocate; McGrigors, LLP

Defenders: Lake; Maclay Murray & Spens, LLP

26 February 2009

[1] The pursuers are a company incorporated in Ireland. They carried on the business of salmon farming at sites in Ireland. They are now in liquidation and receivership. During 1995 and 1996 the defenders supplied the pursuers with salmon feed. The pursuers claim that the feed was defective, and that in supplying such feed the defenders were in breach of their contract with the pursuers. They further claim that the supply of defective feed caused them significant losses. In furtherance of that claim the pursuers have raised an action against the defenders for payment of the sums of £2,078,948 and £1,746,262; those amounts are said to represent the losses sustained by the pursuers at the two sites where the feed was used.

[2] The adjustment of the pleadings has now been completed and a proof before answer has been allowed. The defenders have lodged a motion to ordain the pursuers to find caution of £50,000 for expenses in respect that (1) the pursuers are company in liquidation, (2) the costs of defending the claim are significant in respect that the events in issue occurred over 10 years ago in Ireland and involve complex technical and scientific issues relating to causation and quantum, (3) a funding agreement relied on by the pursuers did not provide the defenders with adequate security and (4) the pursuers had been found liable to the defenders in respect of a discharged procedure roll discussion and amendment procedure. That motion is opposed by the pursuers.

[3] The pursuers are not a company incorporated under the Companies Acts having force in Great Britain, and accordingly section 726(2) does not apply; that subsection only applies to a "company", which is defined by section 735(1) as a company incorporated under the 1985 Act or an "existing company"; the latter expression is defined in the same subsection as a company incorporated under earlier Companies Acts but excluding those applicable in Ireland. Consequently the defenders' motion for caution was made at common law.

[4] I was referred to a number of authorities in which caution at common law is discussed. The first of these was Kaiser Bautechnik GmbH v GA Group Ltd, 1993 SLT 826. In that case (at 827L) Lord Cameron of Lochbroom noted that the defenders had submitted that the criterion adopted in cases under section 726(2) was apt to caution at common law. On that basis, caution was available where there was a substantial risk that any award of expenses in the defenders' favour would not be satisfied. Lord Cameron accepted that in appropriate circumstances a party might be required to find caution where the court was satisfied that there was such a substantial risk present and that it would be inequitable that the party whose circumstances or conduct gave rise to that risk should proceed further in the action without finding caution. In the circumstances of that case, however, caution was refused; the pursuers were not insolvent, and there was no other reason for supposing that caution was required. In Medicopharma (UK) BV v Cairns, 1993 SLT 386, an action was brought by a foreign company which was not insolvent. A motion for caution was refused by Temporary Judge TG Coutts QC. It was conceded that the common law test was higher than the test under section 726 of the Companies Act. The judge stated:

"A litigant is not normally ordained to find caution. In order that that should happen there require to be compelling factors such as the unlikelihood of success in the action or that the litigant was an undischarged bankrupt or that some award or decree having been granted in another matter there had been a failure to pay".

No such factor was present in that case. In Balfour Beatty Ltd. v Brinmoor Ltd., 1997 SCLR 387, Lord Abernethy held that it was competent at common law to ordain a company defender to find caution. Counsel had accepted that the common law tests for caution were different from and more stringent than those under section 726(2); thus at common law mere poverty or an inability to pay a defender's expenses if the defence were successful is not a ground for ordaining a pursuer to find caution for expenses: see 388G and 389C. Apart from those statements, however, little guidance is given in the case as to the tests for caution at common law.

[5] The subsequent case of Fallimento La Pantofola D'Oro SpA v Blane Leisure Ltd. (No 2), 2000 SLT 1264, involved an action brought by an insolvent Italian company for payment of the price of goods supplied. The pursuers' "curatore" (the equivalent of a liquidator) would not under Italian law be personally liable in expenses. The defenders claimed that were entitled to damages for breach of contract, as the goods had failed quality checks, and that they were entitled to set off their claim for damages against the price. The pursuers had, however, taken issue with the defenders' tests on the goods. The sum claimed by the pursuers was sufficiently large to have had a possible bearing on their eventual insolvency. The defenders enrolled a motion for caution. Lord Hamilton reviewed the law in detail. He stated (at pages 1267-1268):

"[7] The courts in Scotland have long exercised a common law jurisdiction in respect of the finding of security for expenses by litigants who are individuals... It would, however, be inappropriate, in my view, to seek to apply without qualification principles applicable to an individual in the circumstances of a limited company. As Millett J said in DSQ Property Co. Ltd. v Lotus Cars Ltd., [1987] BCLC 60, at p 64e-f: 'A limited company is not like an individual. It is a commercial concern with exclusively commercial debts and liabilities. Unlike an individual it can charge its full undertaking to a secured creditor and leave nothing at all for unsecured creditors, even those having priority in a winding up. It is obvious that in some circumstances justice may require such a plaintiff to be required to give security for costs, and this is recognized in the legislation of both Great Britain and Northern Ireland'.

These observations were made in the context of an application under [the English Rules of Court], but I agree with them and regard them as equally relevant to the exercise in Scotland of the court's common law jurisdiction in respect of limited companies. Likewise, the basis on which bankrupt individuals are ordinarily required to find caution..., namely, their being divested of their estates, has limited, if any, application, in my view, to the position of limited companies.

[8] There is, so far as I am aware, no reported case in which a court in Scotland has considered an application at common law to require a limited company to which the Companies Acts provisions do not apply to find security for expenses. There is accordingly no direct guidance. However, the jurisdiction involves discretion in the exercise of which a number of factors will fall to be considered. These will include, but are not limited to, the financial circumstances of the company".

Lord Hamilton went on to consider the various factors that were relevant in that case. The first of these was the availability of adequate funds or other resources on which the defender could recover any award of expenses ultimately made in its favour. In that case this was a relevant consideration, because the defenders held goods that they had not paid for and could set off the value of those goods against any award. The second factor was whether the acts of the defenders that were said to form the basis for the pursuers' claim had been instrumental in bringing about the pursuers' insolvency. It was difficult to reach a view on that factor, although some limited weight might be given to it in view of the size of the sums at stake. The third factor was the prospects of success, although this was taken into account on "a broad and wholly provisional basis". In that case it could not be said the pursuers' claim was entirely without merit. The fourth factor was the extent to which those who had a financial interest in the pursuers and their claim, whether creditors, shareholders or others, might be able or willing to provide security. No information was available on this matter, and it was accordingly not taken into account. Nevertheless, Lord Hamilton expressed regret that there was no information available. Ultimately, on a balancing of the first three of those factors, the motion for caution was refused.

[6] In the present case the primary factor relied on by the defenders was the admitted insolvency of the pursuers. A chartered accountant, Mr. David Mehigan, has been appointed liquidator by the High Court in Ireland. Counsel for the defenders submitted that the litigation was effectively brought on behalf of the pursuers' creditors; they would benefit from any sums that were recovered. Thus those creditors were able to litigate against the defenders with immunity from expenses, and that could give rise to possible injustice. Counsel further pointed out that the liquidator could have sisted himself as a party to the action, thus incurring personal liability for any award of expenses in the defenders' favour, and could then have taken steps to insure himself against such liability. Concern was also expressed at the way in which the litigation had been conducted by the pursuers. The action had been appointed to a diet of procedure roll, and at the last minute the pursuers had produced a minute of amendment. There had been a consequent finding of expenses against the pursuers.

[7] The solicitor-advocate for the pursuers recognized that the insolvent liquidation created a potential problem for him, but he submitted that the matters that were relevant at common law were not limited to the financial circumstances of a company pursuer. In particular, where adequate funds or other resources were available to satisfy an award of expenses in favour of the defender, an order for caution should not be made: La Pantofola, supra, at paragraph [9] of Lord Hamilton's Opinion. Moreover, if there was a "fair prospect" that resources would be unavailable to that end, that was a consideration to be taken into account: ibid. The pursuers' solicitor-advocate relied on a number of factors which, he submitted, supported the view that caution should not be ordered. First, he stressed that the claim was brought by a responsible liquidator who acted under the supervision of the Irish High Court. The liquidator was an officer of the court, and could be expected to act responsibly and carefully. This was illustrated by the responsible approach that he had taken to the conduct of the litigation; in particular he had offered mediation, an offer which was still outstanding. Secondly, the defenders had a substantial business, with large profits and net assets. Thirdly, it had been accepted by the defenders that the pursuers' claim was relevantly stated and should go to proof. Fourthly, the claim was for substantial losses. It had been quantified with the assistance of a forensic accountant, and was for several million pounds. It was reasonable to suppose that the losses founded on, if they were established, had made a material contribution to the pursuers' insolvency. Fifthly, it was of some limited weight that the admitted facts disclosed that the relationship between the parties had been close, and that the defenders had been involved in the pursuers' business.

[8] Sixthly, while the events relied on by the pursuers had taken place some time ago and raised technical issues regarding the supply of fish feed, the defenders had expertise in these issues, and had been closely involved in events from the time that problems first emerged. When meetings had taken place in 1997 regarding the pursuers' problems (fish suffering from cataracts), the defenders' representatives had been present. In addition, from 2000 onwards the defenders had been involved in other litigation in Ireland relating to cataract problems in fish; in that litigation the issues raised were similar.

[9] Seventhly, the liquidator had put in place certain arrangements in order to fund the action. These comprised a funding agreement and a litigation costs insurance policy. The funding agreement, concluded with a company known as Insolvency Management Ltd, provided that Insolvency Management Ltd would pay all legal costs due by the pursuers and the liquidator for their own legal advice, and would indemnify the liquidator against any costs orders made against him or the pursuers in the present proceedings. In return, as I understand the operation of the agreement, Insolvency Management Ltd would become entitled to a proportion of any sum recovered; this part of the agreement was, however, deleted in the version that was made available to me. Clause 2 of the agreement contained a number of warranties made by the liquidator; these included a warranty (clause 2.3) that the liquidator "has disclosed to IML all matters within his actual knowledge which are or may be relevant to the Proceedings or to the prospects of recovery therein and, to the best of the [liquidator's] actual knowledge, information and belief, there are no material facts or circumstances in relation thereto which have not been fully and fairly disclosed in writing to IML prior to the execution of this Agreement and which, if disclosed, might reasonably have been expected to affect the decision of IML to enter into this Agreement". Clause 2.4 provided more specifically that the liquidator was not "actually unaware of any fact or situation that has not been disclosed to IML that would or may... materially adversely affect the prospects of success in the Proceedings". Clause 12 permitted IML to terminate the agreement in the event of a breach of contract by the liquidator, on giving seven days' notice of such termination; the termination of the indemnity was not made retrospective, with the result that IML were liable for any expenses incurred prior to termination. In relation to the funding agreement, the pursuers lodged in process a letter from Messrs Eugene F. Collins, solicitors in Dublin, in which the opinion is expressed as a matter of Irish law that, if the pursuers were unsuccessful in the present action and as a result an order for expenses were made against them, "these costs would form part of the costs, charges and expenses in the liquidation to be discharged in priority to all other claims". A decision of the Irish Supreme Court, Comhlucht Paipear Riomhaireachta Teo v Udaras na Gaeltachta, [1990] 1 IR 320, was cited in support. That decision vouched the proposition that "for an action which is brought by a company after liquidation the costs of the successful defendant... rank in priority to all other claims". The writer of the letter pointed out, however, that that decision related to a company in insolvent voluntary liquidation. The present pursuers, by contrast, were in court or compulsory liquidation. In such a case the payment out of the company's assets of costs, charges and expenses is governed by statutory provisions (notably section 244 of the Irish Companies Act 1963) which confer a discretion on the Irish High Court to determine the priority of such costs, charges and expenses in the winding up. The writer nevertheless expressed the opinion that it was highly probable that the courts in exercising that discretion would treat any costs order in favour of the present defenders as costs, charges and expenses payable out of the assets of the pursuers in priority to all other claims.

[10] The litigation costs insurance policy, concluded with a company known as First Legal Indemnity Ltd, provided for insurance against any liability in expenses to the defenders in the present action up to a limit of £50,000. Clause 1 contained a number of warranties given by the pursuers; these included a warranty that full disclosure had been made to the insurer and that complete and accurate information would be provided to the insurer in relation to all relevant and material matters in respect of which cover was provided. A further warranty provided that all written statements and declarations made by the insured or its legal representatives to the insurer were complete and accurate in all material respects. Yet a further warranty was that the insured and their legal representatives would conduct the action with all due care and diligence. The solicitor-advocate for the pursuers submitted that, in view of the liquidator's position as an officer of the Irish court, it was likely that he would take care to comply with all such warranties. In relation to the requirements of the policy as to the conduct of the litigation, it would be possible to deal with those by means of a protocol concluded between the parties' agents, so that the defenders' agents could be kept informed of any material matters that might affect the validity of the insurance. I was further addressed on the decisions in Al-Koronky v Time-Life Entertainment Group Ltd, [2006] EWCA Civ 1123, and Monarch Energy Ltd v Powergen Retail Ltd 2006 SCLR 824, where litigation costs insurance policies had not been regarded as providing sufficient security to prevent an order under section 726 of the Companies Act 1985. The solicitor-advocate for the pursuers submitted that those cases should be distinguished because they involved allegations of fraud, which meant that there was a serious risk that the insurance had been obtained as a result of misrepresentation about the prospects of success in the action. In addition, in the present case the litigation was under the control of a court-appointed liquidator, who could be expected to act responsibly in all dealings with the insurer.

[11] In relation to the insurance policy, I was informed that the liquidator had already paid the premium, which amounted to £20,000 plus tax. That amount would not be recoverable in a Scottish judicial account, and would be borne by the creditors of the pursuers. Thus this was not a case where the liquidator had sought to use the insolvency of the company as a shield in order to litigate without concern as to the expenses of the action. I was further informed that the principal creditor of the pursuers, the Anglo-Irish Bank, had a floating charge over the pursuers' assets and had appointed receivers under that floating charge; nevertheless the Bank did not wish to fund the litigation and had disclaimed any interest in it. Consequently the litigation was brought by the liquidator on behalf of the other creditors. He considered that the merits of the claim were such that the action should be taken forward, and that is why he had entered into the funding agreement with IML.

[12] Finally, the solicitor-advocate for the pursuers conceded that he was unable to allege that an order for caution would stifle the pursuers' claim. It was likely that IML would put up caution. Nevertheless, that would be an additional funding requirement on the pursuers, imposed in circumstances where responsible arrangements had already been made to fund the action. Overall there was a very substantial prospect that any awards of expenses would be met.

[13] Counsel for the defenders submitted that the funding agreement and the insurance policy were of doubtful value, for a number of reasons. In relation to the funding agreement, he pointed out first that the liquidator had given a number of warranties to IML, but the defenders had no way of knowing whether those warranties had been accurate. The validity of the policy was of course dependent upon the accuracy of the liquidator's answers. Secondly, the obligation under the funding agreement was "to indemnify the Office Holder and/or the Company"; that raised the risk that any funds received from IML would simply disappear into the liquidation, and would not be available to satisfy an award of expenses. Thirdly, counsel referred to the fact that the funding agreement permitted IML to terminate the agreement for a number of reasons. That would permit IML to withdraw from the agreement, thus depriving the defenders of protection.

[14] In relation to the insurance policy, counsel submitted first that that too included a number of warranties by the Insured (which appeared to be the pursuer company); once again the defenders were unable to know whether those had been accurately given. Secondly, the pursuers and their legal representatives undertook to notify the insurer of any material development in the action, but the defenders could not discover whether that obligation had been complied with at any time. Thirdly, in terms of the policy the Opponent's Costs were payable to the Insured, that is to say, to the pursuer company. Because the pursuers were insolvent, the benefit of any such payment would go to the general creditors, not to the defenders. Fourthly, clause 5.5 of the policy provided as follows: "in the event of the Insured becoming insolvent,... [or] upon the appointment of a receiver or administrator... the Insurer reserves the right to terminate this Policy and no payment will be due by the Insurer under the terms of this Policy". The pursuers were already insolvent, and it was not at all apparent how that clause might apply in the circumstances. It was, however, clear that the policy was not intended to apply on insolvency. Fifthly, the policy was vitiated by any misrepresentation by the pursuers or their legal representatives, and contained a number of exclusions, which included unreasonable conduct on the part of the pursuers and the discovery of any matters of fact which seriously reduced the pursuers' prospects of success in the action so that continuation of the action became unviable. Lack of cooperation by the pursuers also constituted an exclusion. Those exclusions, counsel submitted, gave rise to a significant risk that the policy would be rendered invalid in the course of proceedings, thus destroying such security as it afforded the defenders.

[15] The defenders' application for caution is made at common law, and it seems to be accepted that the test for caution at common law is relatively strict. Nevertheless, it seems to me that the fact that the pursuers are a limited company is a factor of some importance. In this respect I agree with the view expressed by Lord Hamilton in La Pantofola, at 2000 SLT 1267-1268, paragraphs [7] and [8] (quoted above at paragraph [5]): a limited company is a commercial concern with exclusively commercial debts and liabilities, and it can deal with its assets in such a way that there is nothing left for its creditors. In these circumstances it is important that the court should ensure that a limited company is not used as a device to enable those who have the underlying financial interest in the litigation to conduct it without fear of an adverse finding in expenses. That consideration becomes particularly important when a company is admittedly insolvent; in such a case it seems to me that a defender should normally be entitled to obtain security for expenses, even at common law, in the absence of any countervailing consideration. It is clearly impossible to give a comprehensive list of such countervailing considerations, but examples would include a case where the defence to the action appeared unlikely to succeed, or where, as in La Pantofola, the defenders already enjoyed substantial security for any future award of expenses (in that case the retention by the defenders of goods that they had not yet paid for).

[16] In the present case the pursuers are admittedly insolvent, and indeed in insolvent liquidation. Consequently, I am of opinion that the defenders should be entitled to an order for caution unless there is a sufficiently strong countervailing consideration. A number of possible countervailing considerations were suggested by the pursuers. Most of these can I think be rejected. The pursuers submitted that it was relevant that the defenders had a substantial business. I cannot see that this is relevant; the point about caution for expenses is to protect the defender against a worthless entitlement to expenses, and it is the financial position of the pursuer that is relevant to that, not the financial position of the defender. Some reliance was also placed on the fact that the defenders had accepted that the pursuers had stated a relevant claim that should go to proof. I accept that the relevancy of the pursuers' case may be significant in that in a case of dubious relevancy the court might be more disposed to make an order for caution. Moreover, I accept that in an appropriate case the parties' prospects of success could be a relevant consideration. Nevertheless, it seems to me that the existence of a relevant claim cannot of itself be sufficient to serve as a countervailing consideration. So far as the overall prospects of success are concerned, I do not think that I have sufficient information at present to reach any view on the matter; on their face the pleadings appear to raise complex issues of fact that are likely to turn on expert evidence, and it is quite impossible at this stage to say how those issues are likely to be resolved. The pursuers further submitted that there had been a close relationship between the parties, and that the defenders had been able to investigate claims made against them in the course of a similar action brought in Ireland by other pursuers. In my opinion these cannot amount to a sufficiently strong countervailing consideration; so far as I can see the relationship between the parties was an ordinary commercial relationship between a supplier and its customer, and the fact that parallel investigations may have taken place does not appear relevant to caution.

[17] The pursuers further submitted that their claim was for a relatively large amount, and that it was reasonable to suppose that the defenders' actings had been a significant cause of the pursuers' insolvency. I do not think that this can be a relevant consideration. The reason is stated by Lord Maxwell in Dean Warwick Ltd v Borthwick, 1981 SLT (Notes) 18, at 19:

"[The argument's] fallacy is that it assumes the pursuer will succeed in the action, whereas caution is required because of the possibility that he will not. Moreover, if the requirement to find caution will in fact make it impractical for the pursuer to proceed, that merely goes to demonstrate that the conditions justifying the requirement of caution are fulfilled".

[18] The most significant argument for the pursuers, however, is that adequate security was provided by the funding agreement and the litigation costs insurance policy. In the pursuers' favour, three important points can be made. First, the litigation costs policy covers the "legal costs payable by the [pursuers] to the [defenders] pursuant to any compromise, Order of the Court, or Judgment" in the present proceedings. That wording appears reasonably comprehensive. Secondly, the subject matter of the action does not involve anything that could be categorized as involving allegations of fraud. In this respect the present case is clearly distinguishable from such earlier cases as Al-Koronky v Time-Life Entertainment Group Ltd, supra, and Monarch Energy Ltd v Powergen Retail Ltd, supra, where allegations of fraud were made in the pleadings. That is significant because, in cases involving fraud, if the insured party loses it is likely to be on account of fraud, and that same fraud will almost certainly avoid the insurance cover. Thirdly, the present litigation is under the control of the liquidator appointed by the Irish High Court. That means that it can reasonably be assumed that a responsible approach will be taken to both the litigation and the insurance policy. In particular, it can be expected that the liquidator will make full and honest disclosure to the insurers, and will notify the insurers of any material developments that occur in the course of the litigation. It can also be assumed that the liquidator has taken some care in the representations and warranties that he has made to the insurer. Nevertheless, some force is taken from this point by the fact that the liquidator will inevitably have been dependent on information obtained from others in making statements to the insurer.

[19] The foregoing considerations are undoubtedly powerful, but there is one further factor that must be taken into account. This is the long established Scottish procedure whereby, when an action is brought by a company in liquidation, the liquidator is conjoined as an additional pursuer. The reason for this practice is simple: the liquidator thereby renders himself personally liable to meet any adverse finding in expenses, and accordingly caution is unnecessary. This procedure does not appear to have been the subject of judicial comment in recent years. I note, however, that in Motor Plants Ltd and Another v D. Stewart & Co, 1909 1 SLT 478, Lord Salvesen refers to the Scottish practice, differing from that in England, "under which it is the almost invariable rule for the liquidator to sue as pursuer along with the company in liquidation". He continues:

"There can be no doubt that the liquidator may be made personally responsible in the expenses of the litigation. This matter was expressly decided by Lord Kyllachy in the case of Sinclair (11 SLT 364). He is recorded as having said that 'It was well settled law in Scotland, whatever it might be in England, that trustees of every description - including trustees in sequestrations - and all persons who defend actions in a representative capacity, personally warrant the sufficiency of the funds in their hands, and are personally liable for expenses.' It is true that, unlike the trustee in a sequestration, the liquidator is not vested with the assets of the company in liquidation. Nevertheless it is he alone who can use the company name for purposes of litigation, and who has, therefore, the control of the litigation. Where, therefore, the liquidator sues along with the company I think it may be taken that the Court is always entitled to hold him liable in the expenses of the litigation, which, but for him, could never have been brought".

[20] In the present case I can see no reason that the pursuers' liquidator should not have himself sisted as a party. If that happens, he will be personally liable for any adverse finding in expenses, which fully protects the defenders; thus no order for caution need be made, as Lord Salvesen held in Motor Plants Ltd. The pursuers and the liquidator are both Irish, but court orders in the United Kingdom and Ireland are fully enforceable in the other jurisdiction. In the event of a finding of expenses against the liquidator, he can obviously recoup himself out of the litigation costs policy. In my opinion as a matter of policy the law should insist that, if a company in liquidation is to avoid the need to find caution, the well-established Scottish procedure should be followed, and the liquidator should sist himself as a pursuer. Such a policy seems to me to be entirely fair, and also to be supported by important practical considerations. As far as fairness is concerned, the liquidator has control over the action and can be said to act for those who stand ultimately to benefit from a successful outcome. Consequently it is only reasonable that he should incur liability for any awards of expenses that are made in favour of the defender. From a practical point of view, the advantage of the traditional Scottish procedure is its simplicity: the defender is protected automatically, and the onus of ensuring that adequate funding is available is placed firmly on the liquidator. The liquidator is best placed to ensure the adequacy of the arrangements that he has put in place. Moreover, to the extent that representations or warranties are made to, for example, an insurer providing litigation costs cover, those representations and warranties are made by the liquidator, and he can ensure their accuracy. The same applies to undertakings that are given about the future conduct of the litigation; the litigation is under the liquidator's charge, and consequently he is best placed to keep the insurer informed about what is happening. At the same time no difficulty arises as to the protection of the defender's position in the liquidation: whether the defender is protected by provisions such as the Third Parties (Rights against Insurers) Act 1930, or by some form of preference in the liquidation (as appears to be envisaged in Ireland in the circumstances set out in paragraph [9] above); the defender is automatically protected by the liquidator's personal liability, and it is for the liquidator to ensure that he is likely to be indemnified either out of the funds in the liquidation or from an external source such as a litigation costs policy. It seems clear that the requirement that the liquidator sist himself as a party brings about a great simplification of the legal position, and is desirable on that account alone.

[21] For these reasons I have decided that the existence of the funding agreement and the legal costs insurance policy are not a countervailing consideration that is sufficient for me to refuse the defenders' motion for caution. I should add, however, that in spite of the considerations discussed in paragraph [18] above I am of opinion that there are significant problems with the funding agreement and the policy. In relation to the funding agreement, it appears that the ability of the defenders to rank in preference to the general creditors depends on the discretion of the Irish High Court. While it may well be supposed that the court would exercise that discretion in the defenders' favour, the matter cannot be said to be entirely free from doubt, and in any event the simple alternative expedient is for the liquidator to sist himself as an additional pursuer. In addition, I do not know what the limit of the cover under the funding agreement is. In relation to the litigation costs policy, my concern relates to clause 5.5, whose terms are set out at paragraph [14] above. That clause appears to assume that the pursuers were solvent at the time when the policy was taken out, and avoids liability in the event of insolvency. In the schedule to the policy, the insured appears to be identified as a company in receivership and liquidation, and the application of clause 5.5 in those circumstances is not wholly clear. At the very least, I think that it can be expected that, where it is known that the insured is already insolvent, any provisions such as clause 5.5 should be deleted; that seems to me to be an elementary aspect of competent draughtsmanship. The very fact that the clause was not deleted seems to me to raise some doubts about the effectiveness of the policy. If the liquidator is sisted as an additional pursuer, of course, these problems are solely matters for him.

[22] I should mention one further argument that was presented for the defenders. This was that, where an action was brought by a company incorporated in a European Union jurisdiction other than the United Kingdom, the common law test for caution should be the same as the test under section 726 of the Companies Act; otherwise there would be discrimination based on nationality in favour of non-UK companies. Reference was made to Dieter Rossmeier v Mounthooly Transport, 2000 SLT 208, a case involving the sisting of a mandatory. In my opinion this argument is ill founded, for the simple reason that a state may discriminate against its own nationals if it chooses to do so. In the event, however, I consider that the policy considerations that underlie the provision of security by corporate pursuers, which are discussed in La Pantofola, supra, at paragraph [7], are such that the test for caution at common law in respect of a foreign company is very close to that under section 726.

[23] I accordingly find that the defenders are entitled to an order for caution. I consider that an appropriate amount of caution would be £40,000, and that the pursuers should be given 28 days to find it. Before I make any such order, however, I intend to give the pursuers a period of 14 days to permit the liquidator to decide whether he wishes to be sisted as an additional pursuer; if he is so sisted, no order for caution will be necessary.