James Patrick Flannery and Another v Mortimer John Walters and Others

• Jurisdiction: Ireland
• Court: Court of Appeal (Ireland)
• Judge: Ms. Justice Finlay Geoghegan
• Judgment Date: 08 July 2015
• Neutral Citation: [2015] IECA 147
• Date: 08 July 2015

James Patrick Flannery & Anor. v Mortimer John Walters & Ors.

James Patrick Flannery and Lexington Services Limited

Plaintiffs/Respondents

And

Mortimer John Walters, Brian Connell, Activity Monitoring Solutions, Catharsis Technologies Limited, Ashley Trust Limited and Ashley Nominees Limited

Defendant/Appellants

And

Catharsis Technologies Limited

Counterclaim Plaintiff/Appellant

And

James Patrick Flannery, Bruce Basheer and Seaf - 2 Limited

Counterclaim Defendants/Respondents

[2015] IECA 147

Finlay Geoghegan J.

Peart J.

Mahon J.

[No. 41/2014]

[No. 42/2014]

THE COURT OF APPEAL

Appeals – Security for costs – Making of an order for security for costs – Order 29 Rules of the Superior Courts – Test pursuant to s. 390 of the Companies Act 1963 –“If it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful”– Counterclaim

Facts On 22nd July 2014 the court made decisions on two notices of motion. The trial judge dismissed an application by the defendants (Walters &Ors) that the plaintiffs (Flannery & Anor) furnish security for costs. The trial judge directed CTL, as counterclaim plaintiff, to furnish security for costs re issues concerning the counterclaim. He fixed the amount at €134, 406.

Two appeals – Appeal by the defendants against an order and judgment dismissing their application for security for costs and appeal by CTL against an order that it grant security in respect of costs of the counterclaim and the amount determined.

1. The trial judge refused the application for security by reference to the positive net asset position shown on the financial statements. The defendants argued that financial statements alone do not provide a reason to believe a company would be unable to pay the costs of a successful defendant. The judge had to consider whether on the evidence the defendants had discharged the onus of satisfying the court that there was reason to believe the company concerned would be unable to pay its costs. On appeal, Finlay Geoghegan J ruled the trial judge was in error in solely considering the net asset position disclosed in the financial statements furnished. The judge concluded that without explanation the financial statements disclosed a significant risk that the company would not be able to meet the costs of the defendants if successful. As the plaintiff, Mr Flannery, was not resident in the EU and his co-plaintiff, the company Lexington, was considered unable to meet the costs of the defendants if successful, the defendants were entitled to an order for security for costs pursuant to Order 29 of the Rules of the Superior Courts.

-Appeal allowed

2. CTL, as counterclaim plaintiff, sought to appeal against an order of the High Court requiring it to give security for costs of its counterclaim and to appeal the amount determined. The trial judge, applying the relevant principles, concluded that he had jurisdiction to make the order for security for costs against CTL. On appeal, Finlay Geoghegan J upheld the decision of the trial judge concluding CTL had taken up the position of plaintiff by joining two additional defendants to the counterclaim and with reference to the claims made against them.

-Appeal dismissed

-CTL as counterclaim plaintiff to give security for costs of counterclaim

1 1. This judgment is given in two separate appeals from a judgment delivered by the High Court (McGovern J.) on the 22 ^nd July, 2014, [2014] IEHC 373 and a supplementary judgment delivered on the 28 ^th October, 2014, determining the amount of the security for costs that would be furnished by Catharsis Technologies Limited ("CTL") as counterclaim plaintiff.

2 2. The judgment of the 22 ^nd July, 2014, made decisions on two notices of motions in the proceedings. Firstly the trial judge dismissed an application by the defendants that the plaintiffs furnish security for costs. Secondly, the trial judge directed CTL as counterclaim plaintiff to furnish security for costs in respect of the issues arising on the counterclaim. In his subsequent judgment, he fixed the amount in the sum of €134,406. On the 28 ^th October, 2014, an order was made in the terms of the judgments dealing with the issues of costs of the motions.

3 3. There are two appeals before this Court: the appeal by the defendants (2014 No. 41) against the order and judgment dismissing their application for security for costs and the appeal by CTL (2014 No. 42) against the order that it grant security in respect of the costs of the counterclaim, against the amount determined and against the failure of the High Court to order that such security be given on a phased basis.

4 4. Since the making of the orders in the High Court and before the hearing of the appeal, CTL had provided the security ordered.

5 5. I propose considering each of the appeals separately as different issues arise. I propose firstly considering the appeal of the defendants (2014 No. 41).

Background Facts to Defendants' Appeal

6 6. Only limited background facts are relevant to the issues arising in this appeal. The first named plaintiff ("Mr. Flannery") is a resident of Andorra. He is accordingly resident outside the State and outside of the EU. The second named plaintiff ("Lexington") is a company which was previously domiciled and registered in the British Virgin Islands and is now registered in Malta i.e. within the EU. The substantive dispute in the proceedings relates to the ownership of certain valuable patents and disputes concerning related agreements. The application for security for costs in the High Court was brought pursuant to O. 29 of the Rules of the Superior Courts against Mr. Flannery and pursuant to O. 29 and s. 390 of the Companies Act 1963 against Lexington.

7 7. In the High Court and this Court it was agreed that as Lexington was a co-plaintiff of Mr. Flannery and now resident within the EU that no order should be made against Mr. Flannery unless Lexington is considered unable to meet the costs of the defendants if successful. It was further agreed that notwithstanding that s. 390 of the 1963 Act does not apply in its terms to Lexington, that the application against it, which was based upon its inability to pay the costs of the defendants if successful should be determined in accordance with the established principles in relation to applications pursuant to s. 390 of the 1963 Act.

8 8. Section 390 of the 1963 Act permits the making of an order for security for costs "if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence". It is not in dispute that the onus is on the applicant/defendants to so satisfy a court. It was further agreed that in considering the evidence before the court, the proper approach is that set out by Murphy J. in the High Court in Bula Limited (In receivership) and Others v. Tara Mines and Others (No. 3) [1987] I.R. 494, where at p. 498 he stated:-

"However, I do not think it is necessary for me to enter into a detailed analysis of the assets and liabilities of Bula Limited. All that the section requires is that it should appear by credible testimony 'that there is reason to believe that the company would be unable to pay the costs of the defendant if successful in his defence.' The defendants believe that to be the position and the fact that the company's bankers have been pressing unsuccessfully for some five years to procure payment of the monies due to them must surely justify the pessimistic views of the defendants."

9 9. It is relevant to note that it was Murphy J. who italicised the phrase "reason to believe" and that he accepted the evidence of unsuccessful pressure by the banks for five years as objectively justifying the position as believed by the defendants. The judgment went on to consider the defence of special circumstances which are not relevant to this appeal.

10 10. The decision and essential reasoning of the High Court judge on the defendants' application is set out at paras. 7- 9 of his judgment where he stated:-

2 "7. The plaintiffs rely on the evidence from the financial statements for the year ending 31st December 2013, as supplemented by a report and financial statement showing the position from 1st January 2014, to 30th June 2014. The plaintiffs say that these reports and correspondence from the auditors confirm the company is solvent and that this is an absolute bar to the making of an order for security for costs against it.

8 It seems to me that these financial statements show a positive net asset position which is the most relevant consideration in considering the ability to meet a costs order. The company holds approximately €4.5m in assets and the costs of defending the action are estimated at €325,918.40. That evidence has not been challenged to any significant degree.

9 The onus of proof is on the applicants to establish reasonable grounds for the entitlement to the order and to meet the test set out in s. 390 of the Companies Acts. In my view, the evidence adduced does not meet that test, and accordingly, I refuse the defendants' application for security for costs against the second named plaintiff. Counsel for the defendants accepts that if no order is made against the second named plaintiff, that the position of the first named plaintiff is irrelevant so far as this application is concerned, so I will refuse the application for security against both plaintiffs."

11 11. The defendants submit that the High Court judge was in error on the facts herein in essentially determining the application by reference to the positive net asset position as shown in the financial statements of which evidence was adduced...