Werdna Ltd v MA Insurance Services Ltd t/a Premier Guarantee
| Jurisdiction | Ireland |
| Judge | Ms. Justice Baker |
| Judgment Date | 17 April 2018 |
| Neutral Citation | [2018] IEHC 194 |
| Docket Number | [2012 No. 6355 P] |
| Court | High Court |
| Date | 17 April 2018 |
[2018] IEHC 194
THE HIGH COURT
Baker J.
[2012 No. 6355 P]
Company – S. 52 of the Companies Act 2014 – Practice & Procedures – Security for costs – Inability of party to meet costs of litigation – Onus of proof
Facts: The first and second defendants sought an order pursuant to s. 52 of the Companies Act 2014 that the plaintiff should give security for their costs of successfully defending the proceedings. The plaintiff offered an agreement by the parent company that its claim would be subordinated or postponed to any costs order in favour of the defendants that might be made by the Court in the present proceedings. The first and second defendants asserted that there were insufficient proofs in relation to the financial affairs of the company.
Ms. Justice Baker made an order, pursuant to s. 52 of the 2014 Act, to the effect that the plaintiff should provide security for costs in the relevant sum in relation to the costs of the first and second named defendants jointly. The Court found that the plaintiff had incurred very substantial liabilities, and the Court was satisfied on the basis of adduced evidence that the plaintiff would be unable to pay for the costs of the first and second defendants. The Court further pointed out that the subordination agreement had not sufficiently dealt with the issue of the standing of the inter-company loans, and whether a third party might challenge the validity of the postponement of the subordination agreement, which would compel the first and second defendants in litigation with the third party.
The first and the second defendants seek an order pursuant to s. 52 of the Companies Act 2014 ('the Act') that the plaintiff should give security for their costs of successfully defending the proceedings.
The proceedings arise from the development by the plaintiff of a mixed residential and commercial development known as 'Timber Mills' at Kilmore Road, Artane, Dublin 5, and the refusal by the first and second defendants to indemnify the cost of remedying defects in the structure of the buildings.
The first defendant is the scheme administrator of the 'Premier Guarantee' structural warranty and at all material times acted as agent of the second defendant, an insurance underwriter and part of the Lloyd's Syndicate.
Proceedings were commenced by plenary summons on 12 June 2013, and defences were delivered by the second defendant on 18 September 2014, and by the first defendant on 2 March 2015. The first and second defendants are now represented by the same firm of solicitors. The discovery process has concluded.
The action against the third defendant was discontinued in 2016 after that defendant issued a motion seeking security for its costs, and before the motion was heard.
The second defendant made a formal request that the plaintiff provide security for its costs on 20 October 2016 based on the filed accounts for the year 2014 and 2015. After the second defendant agreed to indemnify the first defendant in respect of the plaintiff's claim, a further formal request for security was made by letter on 16 January 2017 in respect of the costs of both defendants.
The estimate of the likely costs of €540,000 has since been reduced considerably.
The jurisdiction to require that security be provided by a corporate plaintiff is governed by s. 52 of the Act:
'Where a company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter, may, 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 or her defence, require security to be given for those costs and may stay all proceedings until the security is given'.
The principles are well established and as stated by Ryan J. in Comcast International Holdings Inc. v. Minister for Public Enterprise [2014] IEHC 18, 'the default setting is not to order security for costs, so that the onus is on the applicant'.
The right of access to the courts is not to be lightly restricted and the Supreme Court explained the starting point in Mavior v Zerko Ltd [2013] IESC 15, [2013] 3 IR 268, at para. 4.10 as:
'... the jurisprudence in relation to all of the areas where security for costs is considered starts from the position that, in the absence of some significant countervailing factor, the balance of justice will require that no security be given. An alternative approach would have the effect of shutting out impecunious parties from bringing cases which approach would be both untenable and disproportionate'.
In order to succeed in an application that security be provided the moving party must show a prima facie defence to the plaintiff's claim and that the plaintiff will not be able to pay the costs of a successful defence. Only the second factor arises in the present case as the plaintiff accepts that the defendants have a prima facie defence to its claim. The application is defended on the ground that the defendants have not established that the plaintiff will not be able to meet their costs of successfully defending the claim. The plaintiff also argues discretionary factors.
I turn now to consider the arguments and evidence.
In the five years 2012 to 2016 the audited accounts show net liabilities of the company have increased in every financial year.
The filed accounts show net loss for the year ended 31 December 2014 of €193,686, and total net liabilities of €16,421,983, €15,784,505 whereof was owed to group companies.
Net liabilities for the year ended 31 December 2015 were €16,547,748. Losses for that year were €125,767.
The financial accounts for the year ending 31 December 2016 show a net liability of €16,624,977.
On the last morning of the hearing there was exhibited an analysis of trading figures for the 9 month period from the last audited accounts to 30 September 2017 which show net liabilities of €16,670,818 and a trading loss of €45,841. The figure for net liabilities is increased somewhat (by approximately €50,000) from the figure for the last full year for which figures are available.
However the plaintiff also provided a report from Grant Thornton exhibited in the second affidavit sworn on behalf of the plaintiff, and that analysis shows a net liability of €15,049,654 on account of a stated improvement in the value of the real property assets estimated at €1,621,164.
Were the liabilities to the group companies to be disregarded, the net liabilities of the company were €637,478 in the year 2014, €763,243 in the year 2015, €840,472 in the year 2016, but for the 9 month period up to 5 October, 2017 the company shows assets of €734,851 based on the improved valuations.
The auditors' note to the 2015 accounts makes the following observation under the heading 'emphasis of matter'
'The company incurred a net loss of €125,767 during the year ended 31st December, 2015, and as that date, the company had net current liabilities of €16,547,748. These conditions, along with the matters explained in note 4 to the financial statements indicate the existence of a material uncertainly which may cast doubt on the company's ability to continue as a going concern'.
Note 4 reads as follows:
'The future of the company is dependent on the continued support of its bankers. The directors are in ongoing discussions with the company's bankers and based on the discussions to date the directors are satisfied that the outcome of these discussions will be favourable.
The directors recognise that in the current economic environment risks regarding the achievability of broadcast sales and margins and the timing and accounts of forecast cash flows'.
A similar note is contained in the 2014 audited accounts, but not in those for 2016 although there does not seem to be a material difference in the financial position of the company.
The evidence as it evolved in the course of the affidavits shows that the inter-company liability is unsecured, and that no interest obligation is accruing. The obligation was described as 'open-ended' and there is no agreed date for payment. The plaintiff therefore says that while the inter-group liability is correctly entered in the audited accounts, no present obligation to pay exists and that therefore the company cannot be said to be unable to pay the costs of a successful defendant. In addition, the plaintiff offers an agreement by the parent company that its claim would be subordinated or postponed to any costs order in favour of the defendants that might be made by the court in these proceedings.
By letter dated 17 October 2017 to the plaintiff James McMahon Limited, part of the group undertaking, has agreed to subordinate its debt in the manner therein set out:
'We confirm our agreement to subordinate the Indebtedness [already identified as referring to as the group liabilities] behind any sum and in respect of the legal costs of either or both of the defendants that you become liable to pay to either of both of the defendants pursuant to the Proceedings [already defined as the present proceedings] in the event that both or either of the defendants successfully defend the proceedings at the trial hearing of the Proceedings and either or both of the defendants is awarded legal costs against you. This subordination shall automatically cease upon all such legal costs being discharged and/or in the event that you are successful against the defendant...
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