Parolen Ltd (plaintiff) v Doherty & Lindat Ltd

• Jurisdiction: Ireland
• Judge: Mr. Justice Clarke
• Judgment Date: 12 March 2010
• Neutral Citation: [2010] IEHC 71
• Court: High Court
• Date: 12 March 2010

Parolen Ltd v Doherty & Lindat Ltd

BETWEEN

PAROLEN LIMITED

PLAINTIFF

AND

PATRICK DOHERTY AND LINDAT LIMITED

DEFENDANTS

[2010] IEHC 71

[No. 8473 P/2009]

[No. 349 COM/2009]

THE HIGH COURT

PRACTICE AND PROCEDURE

Costs

Security for costs - Ability to discharge defendants' costs - Prima facie defence - Onus on defendants to satisfy test - Whether defendants failed to discharge onus - Whether consideration of plaintiff's solvency appropriate in application for security for costs - Inter Finance Group Ltd v KPMG Pete Marwick (Unrep, Morris J, 29/6/1998); Usk & District Residents Association Ltd v EPA [2006] IEHC 296 [2007] 4 IR 157 followed - Connaughton Road Construction Ltd v Laing O'Rourke Ireland Ltd [2009] IEHC 7 (Unrep, Clarke J, 16/1/2009); Regal (Hastings) Ltd v Gulliver (Note) [1967 2 AC 134; Canadian Aero Services v O'Malley [1974] SCR 592 considered - Companies Act 1963 (No 33), s 390 Application granted (2009/8473P - Clarke J - 12/3/2010) [2010] IEHC 71

Parolen Ltd v Doherty

Facts: In proceedings for security for costs, the plaintiff asserted that the defendants had failed to discharge the onus of proof on them to establish that the plaintiff would be unable to meet their costs in the event that they were successful and that the defendants had a prima facie defence. The issue arose as to the valuation of assets in a realistic fashion. The most recent accounts of the plaintiff dated to 2008 and showed a net deficit, although it appeared that the plaintiff had significant cash assets. The defendant at one time was a shareholder and director of the plaintiff and had entered into agreements with tax benefits as to property owned by the plaintiff and the issue arose as to how the defendant would be required to hold the relevant agreement for the benefit of the plaintiff and whether this constituted an arguable or prima facie defence.

Held by Clarke J. that the Court would direct that the plaintiff provide security for costs and that in accordance with the practice of the Commercial Court, that the court and not the Master, would fix the security. The parties would be afforded an opportunity to file such further evidence as necessary before fixing the relevant amount. The defendant had discharged the onus of proof on him to show that the plaintiff would not be in a position to meet his costs in the event that he would succeed. Likewise, the defendant had established that he had an arguable or prima facie defence. The plaintiff had met the onus of proof that was on him and as there were no special circumstances asserted, an order for security of costs would be made.

Reporter: E.F.

INTER FINANCE GROUP LTD v KPMG PETE MARWICK UNREP MORRIS 29.6.1998 2000/11/ 4104 1998 IEHC 217

USK & DISTRICT RESIDENTS ASSOCIATION LTD v ENVIRONMENT PROTECTION AGENCY UNREP SUPREME 13.1.2006 2006/56/12022 2006 IESC 1

CONNAUGHTON ROAD CONSTRUCTION LTD v LAING O'ROURKE IRELAND UNREP CLARKE 16.1.2009 2009 IEHC 7

REGAL HASTINGS LTD v GULLIVER 1942 1 AER 378

AERO SERVICES v O'MALLEY 1974 SCR 592

1 JUDGMENT of Mr. Justice Clarke delivered the 12th of March, 2010

1. Introduction

2 2 1.1 This judgment relates to one of what is a growing number of applications coming before the courts in corporate litigation in which security for costs is sought. Doubtless that trend reflects the current general economic conditions and the understandable concern of defendants to such litigation that, should they be successful in defending proceedings brought by a corporate plaintiff, there may be no, or no sufficient, assets available to pay their costs.

3 3 1.2 Be that as it may the basic principles by reference to which the court considers an application for security for costs in such circumstances are now very well established although, as here, there may always be some novel or unusual issues arising in the context of the application of those principles to the circumstances of a particular case.

4 4 1.3 Against that background, I turn to the general principles and the specific issues which arise in this case.

2. The Test and the Issues

5 2 2.1 The relevant test, which has developed in the course of case law over a number of years, is frequently identified by reference to the judgment of Morris J. in Inter Finance Group Ltd v. KPMG Pete Marwick (Unreported, High Court, Morris J., 29 ^th June, 1998) as applied by the Supreme Court in Usk and District Residents Association Ltd v. Environmental Protection Agency [2006] IESC 1.

6 3 2.2 Under that test the moving party must establish two matters:-

7 a A. That there is a prima facie defence to the plaintiff's claim; and

8 b B. That the plaintiff would not be able to pay the moving party's costs if the moving party be successful.

9 4 2.3 If both of those matters are established, then the onus shifts on to the relevant plaintiff to show that there are specific or special circumstances involved which should cause the court to exercise its discretion not to make the relevant order. There is, of course, a significant jurisprudence as to what might amount to such special circumstances.

10 5 2.4 Unusually, this is not a case concerning special circumstances. Rather it is a case in which the plaintiff ("Parolen") asserts that the defendants have failed to discharge the onus which undoubtedly rests on them (a) to establish that Parolen would be unable to meet their costs in the event that they were successful and (b) to establish that the defendants have a prima facie defence. I should in passing note that the second named defendant is a company owned and controlled by Mr. Doherty and that there is, for the purposes of this application, no material difference between them. I will, therefore, refer to the defendants as Mr. Doherty.

11 6 2.5 The two issues on this application are, therefore, as to whether Mr. Doherty has established a prima facie defence and has established that Parolen would not be in a position to pay costs in the event of Mr. Doherty being successful. Save for one matter to which I now turn, the issues which arose under both of those headings were very much specific to the circumstances of this case and of limited general application.

12 7 2.6 It is, however, important to note that the matter which a defendant, such as Mr. Doherty, needs to establish so far as recovery of costs is concerned, is that the relevant plaintiff will not be able to pay that defendant's costs if the defendant be successful. In applications for security for costs there is often, in my view, a tendency to confuse that test with the question of the solvency or otherwise of the relevant plaintiff company. There is, of course, a close connection between the two concepts. Both involve an identification of a company which has financial problems. In some cases there may not, in practice, be any difference. However, it is important to emphasise that the test is not as to whether the relevant plaintiff company is insolvent in the sense in which that term is used in relation to winding up or other similar areas of law. It has to be said that where parties in security for costs applications place before the court the expert views of accountants there has been an unfortunate tendency for those accountants not to identify the difference between insolvency in the proper sense of that terms and the test on an application for security for costs and, thus, to give an opinion as to a matter which is not, strictly speaking, relevant.

13 8 2.7 In order to explain the importance of the difference in some cases it is appropriate to mention a small number of examples. In Connaughton Road Construction Limited v. Laing O'Rourke Ireland Limited [2009] IEHC 7, I had occasion to consider a so called special purpose company which is set up solely for the purposes of a single transaction of series of connected transactions or the like. As I pointed out at para. 3.7 of the my judgment in Connaughton Road, where such a company is established with nominal capital, such company is not insolvent but clearly would not have the means to meet the costs of any unsuccessful litigation which it might mount. It is important to emphasise that what a defendant is required to establish is that the plaintiff would not be in a position to pay costs should the litigation be successful. Where the costs would be significant, it is insufficient for the plaintiff concerned to say that it is not insolvent, if it is clear that it would not have available resources to meet those costs should it lose. A plaintiff, for example, which only had available to it a sum of €50,000 would manifestly not be able to pay €250,000 costs in the event that significant litigation mounted by it, where the relevant defendant was likely to incur costs of that order, was under consideration. Such a plaintiff company would undoubtedly be solvent. However, its solvency would not prevent it being properly described as being in a position where it would be unable to pay the likely costs of a successful defence to its litigation.

14 9 2.8 Likewise, many companies are, properly speaking, solvent because they have the continued support of backers of one sort or another (including bankers to the relevant company). Very frequently start up companies require working capital which is supplied by the company's backers often in the form of directors' loans. As long as the directors remain willing to continue to supply such working capital to the extent needed by the relevant company, then the company will be solvent in the technical sense because it will be able to meet its debts as they fall due. However, on the assumption that the company concerned has no significant net assets, then a very different situation would apply in the event that the relevant company mounted and lost significant litigation such that...