Crossed wires: untangling applications for security for costs

Posted: 24/07/2014

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Applying for security for costs can be a useful means of challenge for a defendant or a counter-defendant but what happens where there are cross-applications for security for costs? In the recent case of Re Fi Call Ltd [2014] EWHC 779, the court gave helpful guidance on when security may be awarded where there are cross claims or where one party is only a nominal claimant.

Background

The dispute concerned a company called Fi Call Limited (“Fi Call”).

In December 2011, identical cross-claims were brought by shareholders in Fi Call under section 994 of the Companies Act 2006, with serious allegations of wrongdoing on both sides. Section 994 is the unfair prejudice provision which provides relief for minority shareholders where the affairs of the company are being conducted in a manner that is unfairly prejudicial to their interests as a member.

Both the parties bringing cross-claims were alleging unfairly prejudicial conduct and claimed relief under section 994, including orders that one or more of the respondents to their petition be ordered to buy out their shares in Fi Call.

Numerous parties were involved in the litigation. In order to simplify matters, the court treated them as two sets of parties: the Apex parties (the claimants/petitioners) and the Global parties (the defendants/respondents).

The applications for security for costs

The Global parties made an application for security for costs requesting that the Apex parties be ordered to provide security in the sum of £2 million.

The Apex parties made a cross application. Their primary position was that neither side should be required to provide security, and so both applications should be dismissed. In the alternative however, if anyone was to provide security, it should be Global.

In contrast, the Global parties’ position was essentially that both sides should give security and that if an order was made again the Apex parties, they would be happy to provide security themselves.

CPR 25.13(2) sets out the conditions under which it is just for a court to make an order for security for costs. The Global parties argued that four of those conditions applied to the Apex parties, which were:

• (a) – where the claimant is resident outside of the jurisdiction but not resident in a country with reciprocal enforcement relations such a Brussels Contracting state or a state bound by the Lugano convention;
• (c) – where the claimant is a company and there is reason to believe that it may be unable to pay the defendant’s costs if ordered to do so;
• (d) – where the claimant has changed his address since the claim was commenced with a view to evading the consequences of the litigation; and
• (g) – where the claimant has taken steps in relation to his assets that would make it difficult to enforce an order for costs against him.

The judge, Newey J, focused on (g).

CPR 25.13(2)(g) – taking steps in relation to assets

The Apex parties consisted of the company Apex Global Management Limited (Apex GM) (the first claimant) and the individual who owned it, Mr Almhairat (the second claimant).

In April 2011, Apex GM had received a payment of $16.7m. However by the time of the application, Apex no longer held that money. In a letter dated 13 May 2013, Apex GM’s solicitors had listed all of Apex GM’s assets, but made no mention of the $16.7m that had been received. Furthermore, no evidence was put forward by Apex GM in the present applications to show that it still held any of the $16.7m.

Newey J consequently drew an inference that Apex GM had paid the money away in order to make it difficult to enforce any costs order against it. He also found that as Mr Almhairat was Apex GM’s sole shareholder and director, he had to be responsible for Apex GM paying the money away.

It could therefore fairly be concluded that the Apex parties had taken steps in relation to assets in order to make it difficult to enforce a costs order against them, and so fell foul of CPR 25.13(2)(g). Accordingly, as Newey J accepted that condition (g) was applicable to the Apex parties, he did not need to go onto consider whether any of the other three conditions ((a), (c) and (d)) applied.

Apex’s arguments

The Apex parties argued that regardless of whether a 25.3(2) condition applied, there should still be no order for security for costs. Two arguments were put forward by Apex:

Mr Almhairat as a nominal claimant

The first argument was that Mr Almhairat was, in reality, only a nominal claimant/claimant in name.

Although at the time of the applications Mr Almhairat was still named as a claimant on the claim, by this point he was no longer advancing any substantive claim of his own and so he was not a claimant “in a real sense”. The only claim he had been asserting had been removed some time ago when the Apex parties amended their particulars of claim.

Apex argued that the fact that Mr Almhairat was no longer advancing any claim of his own meant that the Global parties could not possibly be incurring any costs in defending such a claim.

Apex went on to argue that if it was accepted that Mr Almhairat was only a nominal claimant rather than a true claimant, the test set out in CPR 25.14 regarding when non-parties can be ordered to provide security for costs must be applied. CPR 25.14 allows the court to make an order for security for costs against a non-party if it is just to do so and certain conditions apply (which are set out in CPR 25.14(2)). The Apex parties said that applying that test, Mr Almhairat should not be ordered to give security for costs.

Newey J agreed with the Apex parties that although Mr Almhairat remained a named claimant/petitioner, he was no longer one in a real sense. Accordingly, he found that it was necessary to go on to consider whether the requirements of CPR 25.14 were met (i.e. when a non-party can be ordered to give security), which, he concluded, they weren’t in this case.

In addition, Newey J agreed with the Apex parties that the fact that Mr Almhairat was no longer advancing any substantive claim of his own did indeed mean that the Global parties could not possibly be incurring costs in meeting any claim from Mr Almhairat (as opposed to Apex GM). Any costs incurred by Global must arise from the claims made by Apex GM and Global’s own claims.

Consequently, no order for security for costs was made against Mr Almhairat.

Significance of cross claims

The second argument put forward by the Apex parties was that it would be inappropriate to make an order for security for costs against any of the parties because cross-claims were being made.

The Global parties on the other hand argued that the Apex parties had considerably widened the scope of the litigation by making a number of serious allegations against Global, which went beyond the issues raised in the defence of Global’s petition. They argued that security for costs should therefore be ordered against Apex at least in respect of the extent to which Apex had widened the scope of the litigation by its own petition.

Newey J considered a number of authorities in detail, including B J Crabtree (Insulation) Ltd v GPT Communication Systems Ltd (1990) 59 BLR 43 and several subsequent cases citing Crabtree. He found that the authorities show that the existence of a cross claim will sometimes lead a court to decline to make an order for security for costs in respect of a claim.

Newey J also agreed that if a claim raised issues beyond the extent of the cross claim, it could be appropriate to make an order for security for costs but limit the amount to a sum relating only to the extra issues raised beyond the extent of the cross claim. However, on the present case, he held that he could not see how the issues giving rise to Global’s petition could be satisfactorily disentangled from those arising from Apex’s petition to make such an assessment. He also agreed with Global that the allegations made in Apex’s petition had widened the scope of the litigation, but found that those allegations were relevant to both sides’ petitions, not just Apex’s petition.

He went on to state that if he made an order for security for costs for one party, this could give rise to “one-sided” litigation where one party was put at a significant disadvantage to the other, despite both bringing claims and being both claimants and defendants. Granting security for costs to one party would mean that the other was essentially conducting the litigation with “one hand tied behind their back”.

Finally, he found that the costs being incurred by the Global parties, who were seeking security from the Apex parties, were as much due to its own petition as they were to Apex’s petition.

Outcome

It was held that the correct approach was therefore not to order either side to give security.

• The fact of the cross claims made it inappropriate for security to be ordered;
• Mr Almhairat would not be ordered to pay costs in any event because he was only a nominal party (i.e. no longer a party in the real sense), and the test for non-party giving security was not satisfied.

Analysis

In circumstances where one claimant is essentially a nominal claimant only and not a claimant in the true sense advancing a claim of its own, an applicant should consider, before embarking on any security for costs application, whether the conditions set out in CPR 25.14 relating to security for costs orders against non-parties are satisfied. The applicant would be wise to also have specific regard to whether it can realistically be said to be incurring costs in meeting a claim by such a claimant.

Where there are cross claims, the court may very well find that it is not appropriate to order security against either party if the rival claims essentially raise the same issues, in order to avoid a situation whereby one party is put at an unfair disadvantage to the other. In some circumstances, it may be possible to obtain an order for security for costs where there are cross claims but it is likely that the applicant will need to demonstrate that the respondent has widened the scope of issues in dispute, and security may be limited to the extent to which the issues have been widened. The applicant will also need to show that the issues in the two claims can be satisfactorily disentangled, which may be a difficult test to meet.

This article was published in Solicitors Journal in July 2014.

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