Company unable to pay must give security for costs unless special circumstances

Lough Neagh Exploration Ltd (formerly known as Ulster Natural Resource Ltd) (plaintiff) v Susan Morrice, S

Lough Neagh Exploration Ltd (formerly known as Ulster Natural Resource Ltd) (plaintiff) v Susan Morrice, S. Morrice & Associates Ltd, Priority Oil & Gas Ltd and the Minister for Transport, Energy and Communications (defendants).

Practice and Procedure Security for costs Application by defendants for security for costs in pending proceedings Plaintiff company unable to meet same Whether prima facie defence established Onus on plaintiff to show exceptional circumstances justifying the refusal to make such an order Discretion of the court Factors to be taken into account by court in deciding whether to exercise discretion Companies Act 1963 (No 33), section 390 Rules of the Superior Courts 1986 (SI No 15), Order 29.

The High Court (before Miss Justice Laffoy); judgment delivered 27 August 1997.

In broad terms the same principles govern the determination whether a plaintiff should be ordered to furnish security for a defendant's costs under section 390 of the 1963 Act and under Order 29. They are as follows:

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(a) A defendant who establishes prima facie compliance with the requirements of the relevant provision has a prima facie entitlement to an order for security for costs. In the case of an application under section 390, where it is established or conceded that the plaintiff limited company would be unable to meet the costs of the defendant if successful in his defence, if the plaintiff seeks to avoid an order for security for costs, it must, as a matter of onus of proof, establish to the satisfaction of the court the special circumstances which would justify the refusal of the order.

(b) The prima facie right is not an absolute one and the court has a discretion to be exercised according to the facts of each particular case.

(c) Among the circumstances which the court may have regard to in the exercise of its discretion is whether the plaintiff has made out a prima facie case that his or its financial state flows from the wrong alleged to have been committed by the defendant. In the case of a plaintiff attempting to resist an application under Order 29, this will arise if the plaintiff pleads inability to give security. In the case of an application under section 390, it is not sufficient to make a mere bald statement of fact that the insolvency of the company has been caused by the wrong the subject matter of the claim.

The High Court so held in ordering the plaintiff to furnish security for the costs of the first and second defendants and the costs of the third defendant.

Aidan Walsh SC, Eoin McGonigal SC and Brian Cregan BL for the plaintiff; Paul Gallagher SC and Frank Callanan BL for the first and second defendants; John Gordon SC and Michael Cush BL for the third defendant; Hugh O'Neill SC and Paul Coughlan BL for the fourth defendant.

Miss Justice Laffoy said that this judgment dealt with two applications for orders that the plaintiff furnish security for costs: one brought on behalf of the first and second defendants and the other brought on behalf of the third defendant. She said that she had outlined the factual background to these proceedings in a previous judgment given on 8 August 1997 on the plaintiff's application for interlocutory injunctions against the defendants and the fourth defendant's application for an interlocutory injunction against the plaintiff.

Miss Justice Laffoy said that the plaintiff being a limited company incorporated in accordance with the laws of Northern Ireland, security for costs was sought, not pursuant to the provisions of 390 of the Companies Act 1963, but under Order 29 of the Rules of the Superior Courts 1986. However, it was common case that, in broad terms the same principles govern the determination whether a plaintiff should be ordered to furnish security for a defendant's costs under section 390 and under Order 29. The following is a brief summary of the relevant principles, were are well settled, insofar as they are relevant for present purposes (a) A defendant who establishes prima facie compliance with the requirements of the relevant provision has a prima facie entitlement to an order for security for costs. In the case of an application under section 390, where it is established or conceded that the plaintiff limited company would be unable to meet the costs of the defendant if successful in his defence, if the plaintiff company seeks to avoid an order for security for costs, it must, as a matter of onus of proof, establish to the satisfaction of the Court the special circumstances which would justify the refusal of the order (Jack O'Toole Ltd v MacEoin Kelly Associates [1986] IR 277, at 283). In the case of an application under Order 29, a defendant who establishes a prima facie defence to a claim made by a plaintiff residing outside the jurisdiction of the court has a prima facie right to an order for security for costs, as was held in the Supreme Court in Fares v Wiley [1994] 2 IR 379.

(b) The prima facie right is not an absolute one and the court has a discretion to be exercised according to the facts of each particular case.

(c) Among the circumstances which the court may have regard to in the exercise of its discretion is whether the plaintiff has made out a prima facie case that his or its financial state flows from the wrong alleged to have been committed by the defendant. In the case of a plaintiff attempting to resist an application under Order 29, this will arise if the plaintiff pleads inability to give security. In the case of an application under section 390, it is not sufficient "to make a mere bald statement of fact that the insolvency of the company has been caused by the wrong the subject matter of the claim" (Jack O'Toole case, at 284, per the Chief Justice Mr Justice Finlay).

Miss Justice Laffoy said that these applications were hybrids, in that the plaintiff was incorporated outside the jurisdiction but was a limited company. The decision of Mr Justice Keane in Pitt v Bolger [1996] 2 ILRM 68 to the effect that the undoubted discretion provided for in Order 29 should never be exercised by an Irish court so as to order security to be given by an individual plaintiff who is a national of and resident in another member state of the European Union which is a party to the Brussels Convention, save, possibly where there is cogent evidence of substantial difficulty in enforcing a judgment in that other member state, is not of relevance, given that the plaintiff is a limited company and not an individual.

Counsel for the plaintiff acknowledged that, on the evidence, there was reason to believe that the plaintiff would be unable to pay the costs of the first, second and third defendants if they were successful in their defence. In the view of Miss Justice Laffoy, this was a proper concession to make, as, on the evidence, one could not reach any other conclusion. Counsel submitted that, as a certain admission had been made by the first defendant on affidavit in relation to the use of information which she acknowledged was confidential, having regard to that admission, the plaintiff must succeed in its claim to some extent. However, Miss Justice Laffoy did not understand counsel to contend that these defendants had or any of them had failed to establish a prima facie defence on the merits, but rather that the admission and its consequence was a circumstance which the court should have regard to in exercising its discretion. In any event she was satisfied that each of the defendants had established a prima facie defence upon the merits as required by Order 29 Rule 3. Therefore, she was satisfied that the onus rested on the plaintiff to establish prima facie a special circumstance or special circumstances which would induce the court to exercise its discretion in favour of the plaintiff. Counsel on behalf of the plaintiff submitted that the court should have regard to the following factors which he contended constituted special circumstances on account of which the court should not make orders for security for costs.

Firstly, he said that the position of the plaintiff was analogous to the position of the plaintiff company in Peppard & Company Ltd v Bogoff [1962] IR 180 where it was found that a special circumstance did exist because the financial position of the plaintiff company might, if it substantiated its case, be due to the very actions of the defendant for which they were being sued. Here, it was contended, the potential of the plaintiff for enhancement of its financial position and future growth and prosperity had been hindered by wrongdoing on the part of these defendants.

Secondly, counsel submitted that the plaintiff, being an exploration company, had intangible assets such as information and expertise in relation to oil and gas exploration and a licence to prospect in Northern Ireland, which were not properly reflected on its balance sheet but which, nevertheless, it was contended should be taken into account, on the same basis as it was contended in Bula Ltd (in Receivership) v Tara Mines Ltd (No. 3) [1987] IR 494 that the orebody owned by the plaintiff in that case should be taken into account. Thirdly, counsel submitted that the first defendant, by her own admission, referred to data which was confidential to the plaintiff and should not have been referred to in the revised application for a prospecting licence to the fourth defendant in February 1996. He said that the conduct of the applicant for security for costs is a factor to be taken into account, as was held by Mr Justice Costello in Irish Commerical Society Ltd (in liquidation) v Plunkett [1988] IR 1. The admitted conduct of the first defendant should disentitle these defendants to security for costs. Fourthly, counsel submitted that the plaintiff's action would be stifled and the plaintiff would be deprived of access to the courts and to justice if orders for security for costs were made. The discretionary nature of the order was emphasised in SEE Company Ltd v Public Lighting Services Ltd [1987] ILRM 255. It was submitted on behalf of the plaintiff that the statement of Mr Justice Keane in Lismore Homes Ltd (In Receivership) v Bank of Ireland Finance Ltd [1992] 2 IR at 63 to the effect that to refrain from granting an order for security, save in exceptional circumstances, simply because it might have the effect of stifling a plaintiff's action would be to render section 390 nugatory, was out of line with other authorities and, in particular, Porzelack KG v Porzelack (UK) [1987] 1 WLR 420.

Miss Justice Laffoy said that the factors as set out above, in her view, did not, either individually or in combination, make out a prima facie case of special circumstances such as to justify the refusal of these defendants' application for security for costs. She observed that the plaintiff had not made out a prima facie case that its current financial position flowed from the defendants' alleged wrongdoing. The plaintiff had put in evidence its audited accounts for the year ended 31 October 1996 which clearly established that the plaintiff did not trade at all in the years commencing respectively on 1 November 1994 and 1 November 1995 and that in those years the plaintiff generated no turnover and that the expenses incurred in the main related to professional fees. The plaintiff was in substantially the same financial state prior to the commission of the acts on the part of these defendants complained of. Accordingly, the plaintiff had not established that it came within the ambit of the special circumstance recognised in Peppard & Company Ltd v Bogoff and subsequent cases. The plaintiff's attempt to extend the principle recognised in those cases, in her view, was unsustainable because it was based on an assumption that, but for the commission of the acts on the part of the defendants of which the plaintiff complained, the plaintiff would have been involved in some exploration venture which would have proved to be a success. Miss Justice Laffoy accepted the submission made by counsel for the first and second defendants, that this proposition was far too speculative, far fetched and remote to be tenable.

Miss Justice Laffoy said that the asset in controversy in the Bula case, the orebody, was a tangible asset which it was acknowledged was valuable, although its precise value was in controversy. Nonetheless, it was clear from the judgment of Mr Justice Murphy in that case that its existence was not a factor to which he gave any weight in determining whether to make an order under section 390. There was even less basis for giving weight to the intangible assets which counsel for the plaintiff contended for because there was no evidence that these intangible assets could ever be converted into an asset of substance which could be realised to meet an award for costs made against the plaintiff. Miss Justice Laffoy also referred to Comhlucht Paipear Riomhaireachta Teo v Udaras Na Gaeltachta [1990] 1 IR where the late Mr Justice McCarthy stated that it was no part of his function as he saw it to forecast the outcome of the litigation or to prejudge the facts or express an interim view on the questions of law involved. Miss Justice Laffoy said that she did not construe the admission made by the first defendant in paragraph 103 of her affidavit sworn 16 June 1997, which the deponent prefaced by the statement that she was drawing the matter to the attention of the court for the purpose of avoiding any further misunderstanding, as an admission of liability on the part of the first defendant or any other defendant so as to entitle the plaintiff to the relief claimed by the plaintiff in these proceedings. Miss Justice Laffoy did not think that it would be proper for her to express any view as to whether by that admission the first defendant had admitted to conduct so reprehensible that it will have a bearing on the ultimate outcome of the proceedings. Finally, Miss Justice Laffoy said that there was no evidence that the consequence of an order for security for costs would be to stifle these proceedings. As she had outlined in her judgment of 8 August 1997, James F Kenny, directly and indirectly through Ulster Natural Resources Ltd, is the beneficial owner of the majority of the equity of the plaintiff and the first defendant, indirectly through Ulster Natural Resources Ltd, is the beneficial owner of the minority stake. In an affidavit sworn by her on 28 July 1997, the first defendant averred that Mr Kenny, on whose sole initiative the plaintiff had instituted the present proceedings, is a person of some substance, while the plaintiff is effectively devoid of any assets from which to satisfy an order for costs. This averment had not been controverted. Accordingly, Miss Justice Laffoy ordered that the plaintiff furnish security for the costs of the first and second defendants and the costs of the third defendant.

Solicitors: Eugene F.Collins (Dublin) for the plaintiff; Mason Hayes & Curran (Dublin) for the first and second defendants; Orpen Franks (Dublin) for the third defendant; Chief State Solicitor (Dublin) for the fourth defendant.