Court of Appeal dismisses appeals on security for costs, upholding High Court's full amount order against defendants and counterclaimant.

THE COURT OF APPEAL

Neutral Citation Number: [2015] IECA 147

Finlay Geoghegan J.

Peart J.

Mahon J.

[2014 No. 41]

[2014 No. 42]

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

Judgment delivered on the 8th day of July 2015 by Ms. Justice Finlay Geoghegan

1. This judgment is given in two separate appeals from a judgment delivered by the High Court (McGovern J.) on the 22nd July, 2014,

[2014] IEHC 373 and a supplementary judgment delivered on the 28th October, 2014, determining the amount of the security for

costs that would be furnished by Catharsis Technologies Limited (“CTL”) as counterclaim plaintiff.

2. The judgment of the 22nd 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 28th October, 2014, an order was made in the terms of the judgments dealing with the issues

of costs of the motions.

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

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. 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. 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. 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. 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. 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:-

“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. 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. The defendants

submit that on the evidence, the court should have considered not just the net asset position, but the question as to whether, on all

the evidence before the court, there was reason to believe that Lexington would be unable to pay the costs of the defendants if

successful in their defence. It was submitted that the existence of a positive net asset position in financial statements does not of

itself negate a reason to believe that a company would be unable to pay costs of a successful defendant. The appellants submitted

that the evidence before the High Court having regard in particular to the nature of the business of Lexington and the nature of the

net assets referred to in the financial statements required an explanation in relation to Lexington’s ability to pay costs of the

defendants if successful. Further that in the absence of such explanation on the evidence before the High Court there was reason to

believe that Lexington would be unable to pay the costs of the defendants if successful.

12. The appellants before this Court and (they submitted) before the High Court also relied upon the approach indicated by Clarke J.

in the High Court in James Elliott Construction Limited v. Irish Asphalt Limited [2010] IEHC 234, in which at para. 5.2 he held:-

“I should also take into account, for reasons similar to those which I identified in Parolen Ltd v. Doherty & Anor [2010]

IEHC 71, the fact that Elliott Construction has not chosen to put any more up to date figures before the court. It must,

of course, be noted that in Parolen the last published statutory accounts of the company in question (which were before

the court) showed an asset deficit. Against that fact, the relevant plaintiff argued that it had been able to meet its debts

as they fell due and was, therefore, solvent. The principal focus in Parolen lay in the fact that a company might be

solvent, in the sense that it can meets it debts as they fall due, but might not necessarily (in the absence of an

explanation for that fact and the presence of an asset deficit which is consistent with there being monies available to

meet costs in the event that the proceedings should fail), be able to meet costs should it lose. This case is, of course,

very different in that the last published statutory accounts of Elliott Construction show a very significant surplus rather

than the deficit which appeared in the relevant accounts in Parolen. Nonetheless the general point made in Parolen is of

some relevance. Where there are circumstances that require explanation and where a company does not put before the

court evidence sufficient to give such an explanation, the court should lean against filling in such unexplained gaps in a

manner favourable to the party who could have provided the relevant explanation.”

The Evidence

13. At the date of the issue of the defendants’ notice of motion it is common case that Lexington had not filed any accounts as

required in Malta. In addition to so stating Mr. Connell, the second named defendant and deponent for the defendants stated at para.

10 of his affidavit that Lexington “previously held only one asset which was a financial interest in loans and shares in West Global

Limited (In liquidation)”.

14. The initial response from Mr. Flannery in the first replying affidavit was to indicate that Lexington was then currently in the

process of filing its accounts as required under Maltese law and he also exhibited a letter dated the 20th May, 2014, from Lexington’s

accountants to its board of directors in which the accountant stated:-

“I hereby report on the state of solvency of Lexington Services Limited a company incorporated in Malta under company

registration No. C50993.

I have been asked by the Directors of Lexington Services Limited to report on the state of solvency of the company. The

procedures do not constitute an audit or review in accordance with International Standards on Auditing.

In terms of the request, in my opinion following the approval of the financials as at May 20, 2014 by Silvio Cilia and Rachel

Marie Flannery being the directors of Lexington Services Limited I hereby confirm that the said company is solvent and the

company will be able to pay its debts that fall due within twelve months.”

15. In response, Mr. Connell in a further affidavit disputed the relevance of the letter from the accountant and referred to the fact

that there was no evidence to support the averment made that Lexington is a solvent company. He deposed that it was incorporated

on the 19th January, 1995, as a company in the British Virgin Islands under whose law it is not obliged to file annual returns setting

out its financial position. Further that on the 28th October, 2010, it re-domiciled to Malta and thereby became obliged to file detailed

financial statements in accordance with Maltese law, but that since its registration it “has been delinquent in filing its accounts for

2010, 2011 and 2012 and has never complied with its statutory obligations in this respect to date”.

16. Mr. Flannery in his next affidavit referred to the fact that Lexington had provided funding to “WEST and West Global Limited in

excess of €7,250,000” and has been at the heart of the provision of funding required for the development of the patents in dispute

and that at no time previously had any concern been raised by any of the defendants as to the solvency of Lexington or its ability to

discharge its liabilities as they fell due. Whilst he did not dispute the failure of Lexington to comply with its filing obligations under

Maltese law, he exhibited a report and financial statements as at the 31st December, 2013, which had then been filed and indicated

that Lexington’s auditors were also finalising a bi-annual report for the period of the 1st January, 2014, to the 30th June, 2014. A

copy of the report and financial statements as at the 30th June, 2014, was exhibited to the affidavit of a solicitor for the defendants

sworn also on the 30th June and an indication they were going to be filed in Malta.

17. The hearing took place before the High Court on the 1st and 2nd July, 2014. No further evidence was adduced on behalf of the

defendants and there was no expert evidence even on affidavit on behalf of the defendants which commented on the accounts and

financial statements produced.

18. Whilst it is correct to observe as submitted by counsel for the plaintiffs that there was no expert evidence given on behalf of the

defendants, that of itself does not mean that the defendants had failed to discharge the onus of satisfying the test in s. 390 of the

Act of 1963.

19. What an applicant must do under s. 390 is satisfy the court by credible testimony that there is “reason to believe . . .”. The

credible testimony which the court is entitled to and should take into account may be testimony produced by either party. On the

affidavits before the High Court herein, the relevant evidence which met the threshold of being considered as “credible testimony”

were the financial statements of Lexington for the year to the 31st December, 2013 and the six months to the 3rd June, 2014,

together with the minimal factual averments of Mr. Connell and Mr. Flannery already referred to. What the High Court was then

required to do was to consider, having regard to the submissions made, whether on that evidence the defendants have discharged an

onus of satisfying the court that there is reason to believe that the company concerned will be unable to pay its costs.

20. Clarke J. in the Supreme Court in I.B.B. Internet Services Limited and Others v. Motorola Limited [2013] IESC 53 considered how

the court should approach such an assessment. He considered in some detail whether a balance of probabilities test was appropriate

or not and rejected same following a judgment of the Court of Appeal of England and Wales in Jirehouse Capital and Another v. Beller

and Another [2009] 1 WLR 751. Clarke J. expressed the view that the phrase “reason to believe” should not be defined further for the

reason set out in Jirehouse and to avoid the risk of changing the test and then stated at para. 5.16 of his judgment:-

“While it does not require the court to assess the matter on the balance of probabilities, it does require the court to

consider all material evidence and reach an assessment of the range of likely eventualities and thereby determine whether

there truly is ‘reason to believe’ that the company ‘will’ be unable to pay costs should it lose. That requires that the

evidence satisfy the court that there is something significantly greater than a mere risk of such an eventuality occurring.”

21. The primary submission of the appellants is that the trial judge was in error in simply having regard to the evidence in the financial

statements of the net asset position of €4.5 million. The appellants submit that he was required to consider the totality of the

financial statements and they submit that on a full reading there is reason to believe by reason of their contents that Lexington will

be unable to meet the costs of the successful defendants. They do so primarily upon the basis that the financial statements disclose

that Lexington is not trading; it has not generated any income or profits in the relevant periods and does not indicate any means of

doing so. Further that its only asset is now a shareholding in a subsidiary company Summerland Developments SL which is stated to

be an unquoted company registered in Spain and further that insofar as there are other receivables with related parties, they are

stated to be “unsecured, interest free and have no fixed term of repayment”.

22. In response counsel for the plaintiffs does not dispute that the court should consider the financial statements in accordance with

their terms, but lays emphasis upon the auditors report, the statement of responsibility; the opinion expressed that the financial

statements give a true and fair view of the financial position and in particular the note of accounting policies which in relation to

impairment it states:-

“The carrying amounts of the Company’s assets, other than deferred tax assets, are reviewed at each balance sheet date

to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount

is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit

exceeds its recoverable amount. Impairment losses are recognised in the income statement.”

Finally they refer to the fact that the financial statements disclose that an impairment loss was recognised by the Directors in relation

to West Global ltd.

Conclusion

23. The trial judge was in error in considering only the net asset position disclosed in the financial statements for the purpose of

determining whether or not there was “reason to believe” by reason of the matters disclosed by the financial statements Lexington

will or would be unable to meet the costs of the defendants if successful. Nothing turns on the use of “will” or “would” which are used

interchangeably in the judgments in relation to s.390. It was necessary by reason of the facts disclosed by the financial statements

to consider either the ability of Lexington to realise its assets or otherwise be in a position to pay the defendants’ costs if successful.

24. Even in the absence of expert evidence, the financial statements of Lexington for the years to the 31st December, 2013 and six

months to the 30th June, 2014, and certain of the statements therein are such that, in my judgment, they required explanation in

accordance with the approach of Clarke J in James Elliott Construction Limited and no evidence has been adduced from a director of

Lexington. It appears from the Directors Report in the financial statements (which is undated) that the two directors of Lexington who

signed the Report and financial statements were appointed on the 12th December, 2013, and the 19th June, 2014, respectively. In

accordance with the judgment in James Elliott Construction Limited any uncertainties in the financial statements relating to the

ability of Lexington to meet the costs of the defendants if successful should not be resolved in favour of Lexington.

25. I have concluded that without further explanation the financial statements disclose a significant risk that Lexington will not be

able to meet the costs of the defendants if successful. In accordance with the judgments referred to above the High Court should

consider all the material before it. Accordingly there is on the evidence which was before the High Court, reason to believe that

Lexington will not be able to meet the costs of the defendants if successful. The principal reasons for which I have reached this

conclusion relate to the following matters in the 2013 and 2014 financial statements.

26. First, the 2013 Director’s Report states that “the main function of the company is to act as an investment holding company and

intends to carry on this function. During the period and the first half of 2014, the company concluded the acquisition of a subsidiary”.

The only reference to a subsidiary in the accounts is to Summerland Developments SL, the unquoted company registered in Spain. It

therefore appears this is the subsidiary referred to. The Financial statements indicate that in 2012 it had no financial assets.

27. Under “Future Developments”, the directors state:-

“The company is at present in legal proceedings to recover the receivables due from a related party an impairment

provision was accounted for in 2013 to reflect the risks involved in recovering that amount. All costs incurred in

safeguarding the assets and interests of the company are to be incurred by the shareholders of the company. The

financials do not include any contingent costs or the effect of potential claims that can be made on the company that

relate to the legal proceedings since they are not quantifiable at this stage.

The amount receivable from West Global Limited in the sum of €7,254,204/USD9,986,140 has been written off in the

accounts for year following the liquidation of West Global Limited on the 28th March, 2014. The liquidator is currently

carrying out a review of the company’s affairs. This impairment is being considered only on a temporary basis for the

moment and may be revised at a future date depending on the outcome of the liquidation process concerning the

distribution of assets in the company following the liquidation and, Lexington Services Limited will file amended accounts

accordingly. In the meantime the directors have taken a prudent approach and provided for a full impairment.”

28. The cash flow statement shows that no cash was generated by operating activities in either 2012 or 2013. It indicates advances

to related parties in 2013 of USD831,783 and as at the 31st December, 2013, cash of USD11,832. The statement of the financial

position as at the 31st December shows a net asset value of USD5,559,312. This is after the write down of USD9,986,140. The net

amount is made up of the investment in the subsidiary and receivables with related parties which are stated to be unsecured, interest

free and have no fixed term of repayment.

29. In my judgment having regard to the above facts a significant concern and question is raised by Note 10 to the financial

statements of 2013 which under the heading “Going Concern” and states:-

“The company has reported loses from operating activities and has a positive net asset position. The losses sustained

reflect the exceptional costs after taking account of the impairment provision on a receivable with a related party. On this

basis the directors are confident that the company will be successful in improving profitability and accordingly considers it

appropriate to prepare the financial statements under the going concern basis.

The company is said to be a going concern if the company is successful in generating profits. However there is no

certainty that the company be able to generate profits to continue as a going concern. The company may therefore be

unable to continue realising its assets and discharging its liabilities in the normal course of business but the financial

statements do not include any adjustments that would result if the company were unable to continues as a going

concern.”

30. There is at minimum an ambiguity between the statements relating to the company’s ability to generate profits in the two

paragraphs. In the first “the directors are confident that the company will be successful in improving profitability” but in the second

they state “there is no certainty that the company be able to generate profits to continue as a going concern”. These statements

are made in a context of accounts which disclose no income or operating activities in 2012, 2013 or first half of 2014 and where apart

from receivables, the only asset is the investment in the subsidiary acquired in 2013 about which there is no information and no

indication of an ability to generate dividends for distribution to its holding company.

31. The last paragraph also raises a serious question in relation both to the ability of the company to continue as a going concern and

the adjustments which would result if it were unable to do so, including its ability to realise monies from the investment in the

unquoted subsidiary or other receivables from related companies. The financial statements for the first six months in 2014 continue to

show a similar picture and repeat the same statements at Note 10. They also disclose that no income or cash was generated from

operations. There was no evidence before the court of the ability of Lexington to generate profits and having regard to the statement

at Note 10 and the nature of the assets it appears to me that, in the absence of explanations from Lexington the financial statements

produced by Lexington can only be considered as indicating a significant risk that it would be unable to pay the costs of the

defendants if successful.

32. It follows that as Mr Flannery is not resident within the EU and does not have a co-plaintiff which is considered able to meet the

costs of the defendants if successful, that the defendants are entitled to an order for security for costs also against Mr Flannery

pursuant to Order 29 of the Rules of the Superior Courts.

33. Accordingly, I would allow this appeal and make an order that the plaintiffs provide security for costs.

34. I would hear the parties as to the further consequential orders to be made, including, in relation to fixing the amount of the

security. There is a significant dispute on the affidavits in relation to the amount and it appears to me that, unless the parties agree

the amount, this is a matter which should probably be remitted to the High Court for determination.

Appeal of CTL

35. CTL as counterclaim plaintiff appeals against the judgments and orders of the High Court requiring it to give security for the costs

of its counterclaim and fixing the amount of the security.

36. CTL is a company incorporated in Malta. The application for security for costs is brought pursuant to O. 29 of the Rules of the

Superior Courts. As it is resident within the EU it was and is agreed, correctly in my view, that the only basis upon which an order for

security should be granted is if the test in s. 390 of the Companies Act 1963 is met. That aspect of the position of CTL is similar to

that of Lexington.

37. There are four issues in this appeal, which I propose considering in turn. The first is whether in accordance with what are the

agreed principles in relation to an application for security for costs against a counterclaimant the trial judge was correct in his

determination that the nature of the counterclaim being pursued by CTL against the counterclaim defendants was such that the court

had discretion to make an order for security for costs.

38. There is no real dispute about the principles to be applied it is rather the application of those principles to the facts. It is not

suggested that the approach in this jurisdiction differs from that in England and Wales and the Court was referred amongst others to

the judgments of Vaughan Williams L.J. and Farwell L.J. in New Fenix Compagnie Anonyme D’Assurance de Madrid v. General Accident

Fire and Life Assurance Corporation Limited [1911] 2 KB 619, which are considered to set out the relevant principles. As appears from

those judgments the starting point is that an order for security for costs will not be made against a defendant residing out of the

jurisdiction. However, where a defendant either sets up a counterclaim or brings a cross action, then the court may have jurisdiction

to make an order for security for costs. In general, no order will be made against a defendant who is simply setting up a claim by way

of defence to an action. However, as put by Vaughan William L.J. a p. 625, “One must look in each case to see whether in substance

the claim set up by a defendant is set up by him by way of defence to the claim against him”. Later at p.625, he stated positively

what should be considered by a court on such applications:-

“We have to consider whether, in substance, upon the facts of the particular case, the defendants in the original action

are to such extent plaintiffs in the cross-action, that they ought according to the general practice in the matter to be

ordered to give security for costs, because they have taken up the position of plaintiffs, irrespective of defence to the

original action. I think that each case of this kind must be judged on its own merits."

39. Farwell L.J. at p. 632, put it this way:-

“It is not conclusive in such a case, for the purpose of obtaining security for costs, to show that a party resident out of

the jurisdiction brings in by way of counterclaim some matter which to some extent goes beyond defence strictly so

called. The substance of his counterclaim must be looked at, and, if it goes so far beyond the subject matter of the

original claim as to constitute in substance a fresh action, which seems to me to be the case here, then an order for

security for costs ought to be made against him.”

40. The above principles apply even where the claim and counterclaim arise out of the same subject matter as appears from the

judgment of Lawton L.J. in The Silver Fir [1980] 1 Lloyd's Rep. 371, cited by the trial judge.

41. The conclusion of the trial judge in applying the above principles was that he had jurisdiction to make an order for security for

costs against CTL. His stated reasons were that the counterclaim joins additional parties to the proceedings and raises new claims

raising new legal and factual issues going beyond the defence of the plaintiffs’ claim.

42. I agree with the conclusion of the trial judge that CTL in joining two additional defendants to the counterclaim has taken up the

position of a plaintiff in respect of those persons. Further insofar as those added counterclaim defendants, Mr. Basheer and Seaf-2

Limited (“Seaf”) are concerned all the claims made against them are new claims in the sense they are not parties to the plaintiffs’

proceedings. The claims in conspiracy against Mr. Flannery and Mr. Basheer (including a claim for damages for conspiracy) is a new

claim and since Mr. Basheer is not a plaintiff in the proceedings, is one which goes beyond a matter of defence. Similarly insofar as

the counterclaim appears to include a claim against Mr. Basheer by reason of alleged breaches of duty when engaged as an adviser to

CTL that is also a new and distinct claim in which CTL has set itself up as plaintiff. It is unclear to me whether CTL is pursuing a claim

for damages for breach of duty against Mr. Basheer as same does not appear to be expressly claimed notwithstanding that pleas of

breach of duty are made and a generic plea of loss and damage by CTL “by reason of the matters aforesaid” is made.

43. Accordingly I would uphold the trial judge’s decision that on the facts herein having regard in particular to the addition of new

counterclaim defendants and the claims made against them that CTL has taken up the position of plaintiff in addition to the defence

to the plaintiffs’ claims such that the court may make an order for security for costs against it, if the other relevant criteria are met.

Throughout the submissions, the counterclaim defendants were considered collectively and no submission was made that there should

be any different treatment given that they are collectively represented, if successful there will be only one order for costs and one

order for security was sought.

44. The second issue relates to the trial judges conclusions in relation to s. 390 of the Companies Act 1963. As with Lexington, in the

previous appeal, it was agreed that the relevant test to be met by the counterclaim defendants is that in s. 390 of the Companies

Act 1963, notwithstanding that CTL is registered in Malta. It was also agreed that a prima facie defence had been made out.

45. CTL is a company established to exploit the patents the ownership of which is in dispute in the proceedings. The shareholding in

CTL is also in dispute. CTL does not appear to have filed accounts in Malta. The evidence of the financial situation of CTL before the

High Court was principally a one page statement of financial affairs as at the 31st December, 2013, exhibited by Mr. Connell the

second named defendant who is a director of CTL and who made an affidavit on its behalf in response to the application for security

for costs by the counterclaim defendants and the grounding affidavit of Mr. Basheer. Mr. Basheer deposed to a “funding requirement

document” which was not exhibited by reason of concerns about a non-disclosure agreement entered into by CTL on the 15th

January, 2014, but which he deposed indicated that CTL “is clearly insolvent”. He deposed that CTL had failed to file accounts in

Malta and that the funding requirement document is the only evidence available in relation to the solvency of CTL.

46. Mr. Connell in his replying affidavit disputes the insolvency of CTL. He exhibits the statement of financial affairs as at the 31st

December, 2013. This shows total assets of €533,179 and total current liabilities of €1,011,697. The statement discloses unpaid

contributions from Mr. Flannery of €402,602. These are contended to be due and owing by reason of a funding obligation of Mr.

Flannery to fund 80% of all costs incurred by CTL. He appears to have ceased providing funding to CTL in June 2013.

47. There was a significant dispute before the trial judge as to whether or not by reason of Mr. Flannery’s funding obligations to CTL

it should be determined that the counterclaim defendants had failed to establish by credible evidence that there was reason to

believe that CTL would be unable to meet the counterclaim defendants' costs if they were successful. The trial judge accepted the

submission made on behalf of the counterclaim defendants that it was an untenable proposition to suggest that the obligations of Mr.

Flannery pursuant to his funding obligations (the extent of which are disputed) extended to meeting 80% of costs which might be

awarded in favour of the counterclaim defendants against CTL if they were successful in defending the counterclaim brought by it

against them. In my judgment it was open to the trial judge to reach this conclusion on the evidence before him. An agreement to

fund which included such costs would require very clear wording and there is no evidence of such in the affidavits and exhibits before

the trial judge.

48. The second aspect of this ground of appeal related to the position of CTL as disclosed by the financial statements produced.

Again it appears to me that on the evidence of the statement of financial affairs, the trial judge was correct on the facts herein in

concluding that it provided credible testimony that CTL would be unable to meet the costs of the counterclaim defendants if

successful.

49. Accordingly, I would dismiss the appeal against so much of the order and judgment of the trial judge as decided that CTL as

counterclaim plaintiff should give security for costs of the counterclaim.

Amount of security

50. Following the initial determination of the trial judge that CTL give security a further hearing was held following written submissions

on the question of the amount of the security to be furnished. The principal issue was whether the High Court was bound to make an

order for one third of the amount of the costs following the judgment of Laffoy J. in the High Court in Ticket Generator Limited v.

Dublin Airport Authority [2012] IEHC 216, or whether it had discretion to award a greater amount following the reasoning of Clarke J.,

in the High Court, in Harlequin Property (SVG) Limited v. O’Halloran [2012] IEHC 13 and Cooke J. in Goode Concrete v. CRH plc and

Others [2012] IEHC 198.

51. The trial judge in his written judgment delivered on the 28th October, 2014, considered carefully the respective submissions and

the relevant Supreme Court judgments, in particular Thalle v. Soares & Others [1957] I.R. 182, Fallon v. An Bord Pleanála [1992] 2

I.R. 380 and Framus Limited v. CRH plc [2004] 2 I.R. 20, all of which had been referred to by Laffoy J. in Ticket Generator Limited

and other than Framus been referred to by Clarke J. in Harlequin.

52. The trial judge had the benefit of one further Supreme Court judgment since the judgment in Ticket Generator. It is a judgment of

Clarke J. (with whom Denham C.J. and O’Donnell J. agreed) in Farrell v. Bank of Ireland [2013] 2 ILRM 183, [2012] IESC 42. That

judgment concerned the grant of security for costs on an appeal from the High Court to the Supreme Court. However, in the course

of the judgment Clarke J. refers to Thalle v. Soares (which was an O. 29 case) and Fallon (which was an appeal case) as identifying

“a practice which suggested that security in the amount of one third of the costs estimated as being likely to arise should be

ordered”. He then stated that it was not clear as to what the origins of that practice may have been and referred to his own

judgment in the High Court in Harlequin. Having considered as a matter of principle, the question as to whether the analysis in those

cases and that practice should continue, he indicated it should be left over for another case as it was not fully argued. However, he

then stated “It is clear that the existing jurisprudence does allow, in an appropriate case, a departure from the so called 'one third

rule'".

53. The trial judge herein having referred to the judgment of Murray J. in Framus which was central to the reasoning of Laffoy J. in

Ticket Generator, stated:-

“9. Like Laffoy J. I believe the legal issues surrounding the distinction to be drawn between a foreign corporate plaintiff

and an Irish corporate plaintiff under O. 29 and s. 390, respectively, is anything but clear. For my part, I do not read the

Framus judgment as limiting the discretion which I have to decide on the amount of the security to be ordered, although

it does appear to suggest that the ‘one-third rule’ is the default position to be adopted in the absence of special

circumstances. In Farrell v. Bank of Ireland, the Supreme Court seems to have pulled back somewhat from that position

and I feel I am entitled to rely on it. It is difficult to ignore the obvious problem that arises if foreign companies could

maintain proceedings in Ireland on easier terms than Irish companies. Clarke J. referred to this problem in the Harlequin

case (para. 4.11). Such an anomaly could not serve the interests of justice. It is one of the hallmarks of justice that

there should be consistency and equality of treatment between similar parties presenting before the courts in similar

circumstances. . . .

10. There seems to be no good reason in this case why the counterclaim plaintiff should be treated any differently than

an Irish company would be in similar circumstances, having regard to the fact that I directed security be furnished on the

basis of inability to pay the costs of the defendants to the counterclaim if successful in their defence. In those

circumstances, I will fix security in the full amount of such figures as I calculate on the basis of the competing sums

offered by the legal cost accountants for each party.”

54. In my judgment the trial judge was correct in his conclusion that the Supreme Court judgments collectively do not limit his

discretion to depart from the so called “one third rule” where as on the facts herein, he has determined that a limited company

registered outside the jurisdiction but within the EU should give security on the basis of inability to pay the costs of the defendants.

Whilst the basis for such an application is O. 29 of the Rules of the Superior Courts as the company is resident outside the jurisdiction

of the courts of this State, it is now well recognised that in practice an order may not be made under O. 29, simply by reason of such

residency if the plaintiff is resident within the EU. Such an approach would be discriminatory and contrary to EU law.

55. The trial judge, it is clear from his reasoning in paras. 9 and 10, did not consider himself bound to make an order for security in the

full amount. It was agreed and acknowledged before him that s. 390 in its express terms did not apply to CTL. It is implicit in the

opening sentence at para. 10 of his judgment, that the trial judge had regard to the facts pertaining to CTL in these proceedings in

reaching the conclusion that it was an appropriate case in which he should order the full amount of the security. The affidavit sworn

on behalf of CTL in the application for security for costs before the High Court did not suggest that CTL would be unable to proceed

with its counterclaim if required to give such security. On the contrary the contention being advanced was that CTL was solvent.

56. In an application for security for costs where the judge or court has discretion as to the amount of the security to be determined,

the balance sought to be achieved should primarily be the balance between the right of a defendant to recover costs if he

successfully defends a claim and the right of a plaintiff to have access to the courts or as suggested by Clarke J. in Farrell in relation

to an appeal, the right to have litigation fairly conducted. Whilst in this case the trial judge did not expressly refer to such balance,

nevertheless it appears to me that he did have regard to the particular factual circumstances of CTL which is part of such balance.

Further it was permissible for him to have regard to the position of CTL in comparison with a limited company incorporated in Ireland

as it was agreed that the test in s.390 was applicable to the issue as to whether security should be granted. No submission was

made on appeal that if the so called ‘one third rule’ did not apply the amount fixed by the High Court was excessive. Finally no case

was made that CTL would be prevented from pursuing its counterclaim if security was ordered.

57. In my judgment on the facts before him, the trial judge was not in error in exercising his discretion in favour of making an order for

the full amount of what he determined to be a reasonable estimate of the costs associated with the counterclaim on the basis set out

in paras. 11 and 12 of his judgment.

58. The final issue was CTL’s contention on appeal that the trial judge ought to have exercised his discretion to make a phased order

for security for costs. He did not address this issue in his written judgment. CTL contends that a submission to that effect was made

in the High Court in reliance upon the approach taken by Clarke J. in Harlequin. In that judgment he noted at para. 6.2:-

“In the ordinary way, it seems to me that the amount of security that should be provided needs to be determined once

and once only and at an early stage in the process. Any minor advantage that might arise, in most ordinary cases, from

attempting to fine-tune that amount as the process continues will be more than outweighed by the disadvantage of

repeated applications to the court (each with their own costs and delay and each with their own capacity to deflect the

parties from bringing the real issues to trial). However, there can be cases where there is likely to be a major watershed

event at some stage during the process which can have a very large effect on the likely costs that will be incurred at

trial.”

59. Notwithstanding that the trial judge did not deal with this issue in the High Court, it appears to me on the affidavits and pleadings

as they relate to the counterclaim that there is no “watershed event” of the type envisaged by Clarke J. in the above suggested

approach which required to be expressly addressed and decided by the trial judge and certainly nothing which could form the basis of

an appeal against the judgment and order without phasing made.

60. Accordingly, I would dismiss the appeal of CTL as counterclaim plaintiff against the judgments and orders made by the High Court.