Crossed wires: untangling applications for security for costs

Applying for security for costs can be an invaluable strategic tool for a defendant or claimant/counter-defendant. But what happens where there are cross-applications for security for costs? In 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.

In December 2011, identical cross-claims were brought by shareholders in a company called Fi Call Ltd under section 994 of the Companies Act 2006, with serious allegations of wrongdoing on both sides. Section 994 is the unfair prejudice provision that provides relief for 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 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. 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 Global parties made an application for security for costs, requesting that the Apex parties be ordered to provide security in the sum of £2m.

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.

The Global parties’ position was essentially that both sides should give security and that if an order was made against the Apex parties, they would also be happy to provide security.

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 as 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 the final point: taking steps in relation to assets.

Asset management

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

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

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

Therefore, it was fair to conclude that the Apex parties had taken steps in relation to their assets
to make it difficult to enforce a costs order against them and so fell foul of CPR 25.13(2)(g). As Newey J accepted that condition (g) was applicable to the Apex parties, he did not need to go on to consider whether any of the other three conditions (CPR 25.13(2) a, c and d) applied.

The Apex parties argued that, regardless of whether a 25.13(2) condition applied, there should still be no order for security for costs. Two arguments were put forward by Apex.

Name only

The first argument was that Almhairat was a nominal claimant/claimant in name only. Although, at the time of the applications, Almhairat was still named as a claimant, 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, as Almhairat was no longer advancing any claim of his own, 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 Almhairat was only a nominal claimant rather than a true claimant, the test set out in CPR 25.14 regarding security for costs orders against non-parties 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, in applying that test, Almhairat should not be ordered to give security for costs.

Newey J agreed that, although Almhairat remained a named claimant/petitioner, he was no longer one in a real sense. Accordingly, he found that it was necessary 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 were not in this case.

In addition, Newey J agreed that because Almhairat was no longer advancing any substantive claim of his own, the Global parties could not possibly be incurring costs in meeting any claim from 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 Almhairat.

Serious allegations

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.

On the other hand, the Global parties 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.
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 held 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 to limit the amount to a sum relating only to the extra
issues raised.

However, in the present case, 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 Global’s own petition as they were to Apex’s petition. The correct approach was therefore not to order either side to give security.

Nominal claimant

Where one claimant is essentially a nominal claimant only, and not a claimant in the true sense advancing a claim of its own, the applicant defendant should consider whether the conditions set out in CPR 25.14 are satisfied before embarking on a security for costs application. Also, the applicant would be wise to 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 or arise from the same issues, 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 in practice. SJ

Nicole Finlayson is a senior associate at Penningtons Manches

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