Court of Appeal allows appeal refusing security for costs under Companies Act 1963 s.390 to protect access to justice.

THE COURT OF APPEAL

Neutral Citation Number: [2015] IECA 68

Appeal No. 2014/575

[Article 64 Transfer]

Peart J.

Hogan J.

Mahon J.

BETWEEN

CMC Medical Operations Limited (In Liquidation) trading as Cork Medical Centre

Plaintiff/Appellant

- and –

The Voluntary Health Insurance Board

Defendant/Respondent

JUDGMENT of Mr. Justice Gerard Hogan delivered the 27th day of March 2015

1. I have read the judgment which Mahon J. is about to deliver and I agree with it. I would merely wish to add some comments of my

own.

2. The statutory power to direct security for costs conferred by s. 390 of the Companies Act 1963 (“the 1963 Act”) represents a

classic example of “proceedings, procedures, discretions and adjudications which are permitted, provided for, or prescribed by an Act

of the Oireachtas” described by Walsh J. in East Donegal Co-Operative Livestock Mart Ltd. v. Attorney General [1970] I.R. 317, 341.

As the Supreme Court itself made clear in that case, such a discretionary power must be exercised in accordance with fundamental

constitutional principles and respect the essence of constitutional rights.

3. The administration of justice is committed to the judicial branch of government by Article 34.1 of the Constitution. Access to

justice is, accordingly, an indispensable feature of the constitutional order so that no “unnecessary monetary obstacle should be

placed I n the path of those who seek access to the courts”: Malone v. Brown Thomas & Co. Ltd. [1995] 1 I.L.R.M. 369, 373, per

Hamilton C.J. While there is no doubt but that a requirement as to security for costs does serve a legitimate aim and purpose, the

Supreme Court has already recognised in other contexts that the security for costs requirements may, if fixed at too high a sum, may

lead to a situation where a defendant “may be able to defeat an honest and substantial claim because the plaintiff cannot find the

necessary security”: Thalle v. Soares [1957] I.R. 182, 193, per Kingsmill Moore J. This passage has been expressly approved by the

Supreme Court in more recent times: see Framus Ltd. v. CRH plc [2004] IEHC 25, [2004] 2 I.R. 25, 58, per Murray J.

4. The position of limited companies is, of course, different in principle to that involving litigation brought by private individuals. Such

companies enjoy the privilege of limited liability and, unless security was ordered, there is a real risk that such companies could use

the shield of limited liability in such a manner as to force other litigants either to compromise on unfavourable terms or else, to adopt

the words of Kingsmill Moore J. in Thalle, to face “the threat of expensive litigation whose costs may be irrecoverable.” This has been

the consistent view of both the pre-1922 legislature and (post 1922) the Oireachtas since the special statutory power to order

security for costs in the case of limited companies was first provided for by s. 69 of the Companies Act 1862. This section

represented the earliest precursor to the modern s. 390 power.

5. Of course, it may be said that nobody is obliged to trade through the vehicle of a limited company and that, if they do, they

cannot be heard to complain if the company is required to give “sufficient security” should it be otherwise unable to pay the costs of

the other party. This, however, in some respects obscures the reality of modern commercial life, since it would be unrealistic to

expect entrepreneurs (such as the plaintiffs in the present case) to take on the huge financial risks of an important venture such as

the establishment of a major private hospital without the protection of limited liability, not least where their competitors will inevitably

enjoy such protection. Of course, the development of entrepreneurship and the creation of new corporate entities who will innovate,

compete and improve and who are prepared to offer new products and services is an important aspect of public policy on which the

future progress and prosperity of this country depends.

6. In this regard it must be recalled that Article 40.6.1.iii of the Constitution guarantees the general right to form “associations and

unions”. The substance of the constitutional right to form associations would, I think, be compromised if citizens could not, at least

generally speaking, choose to form an association with legal personality which could sue and be sued, even if, of course, the

formalities of incorporation and the manner in which that right was to be exercised must naturally be regulated by law. That

constitutional right to associate would nevertheless be severely impaired in many cases if citizens could not form an association with

legal personality, especially if they considered that this was the mechanism which could best give effect to their collective aims and

objectives, whether this be for commercial, representational, sporting or other purposes. Indeed, absent legal personality, no

“association or union” in the sense contemplated by Article 40.6.1.iii could really come into existence, as one would otherwise be

simply left with a loose assembly of private citizens with no particular legal standing which was not recognised by the law. Insofar as

Carroll J. suggested to the contrary in Private Motorists Provident Society Ltd. v. Attorney General [1983] I.R. 339, 355, I believe

that she was incorrect.

7. This does not mean, however, that the Oireachtas is obliged to afford the privilege of limited liability to corporate entities or that,

where it does so, it cannot regulate or control that privilege. Nevertheless, given that the Oireachtas has in fact elected through the

mechanism of the 1963 Act to permit the creation of corporate bodies enjoying the privilege of limited liability, these companies must

nevertheless in principle enjoy the constitutional right of access to the courts, even if that right can also be regulated by law in a

manner which might not permissible in the case of a private citizen: see, here by analogy, the comments of Keane J. in Iarnród

Éireann v. Ireland [1996] 3 I.R. 321, 347-348 and those of McKechnie J. in Digital Rights Ireland Ltd. v. Minister for Communications

[2010] IEHC 221, [2010] 3 I.R. 221.

8. In my view, the whole object of the jurisdiction conferred by s. 390 of the 1963 Act is fundamentally to protect against the

potential abuse of the privilege of limited liability. In addition, this section must also be construed and applied in a fashion which does

not negate the substance of the right of access to the courts. As important decisions such as McCauley v. Minister for Posts and

Telegraphs [1966] I.R. 345 and Blehein v. Minister for Health and Children [2008] IESC 40, [2009] 1 I.R. 275 have all made clear, this

principle is fundamental to the constitutional order. Accordingly, I consider that the statutory power to order security should not be

exercised where this would be oppressive or would stifle a genuine claim.

9. It is true that Clarke J. suggested in his judgment in Connaughton Road Construction Ltd. v. Laing O’Rourke Ireland [2009] IEHC 7

that where, prior to the alleged wrongdoing, the plaintiff company had no significant net assets, it would need to establish that “in

the absence of the wrongdoing alleged, it would have acquired net assets sufficient to enable it to discharge the defendant’s costs in

the event that the defendant were successful” in order to avoid an order for security for costs under s. 390 of the 1963 Act.

10. The effect of this test appears to be that an impecunious plaintiff company may face an order for security for costs even where

the plaintiff could demonstrate that it would otherwise have a good cause of action. If, for example, the company has a deficit of

€40,000 and the costs of the proceedings have been estimated at €60,000, does this mean that it should face an order for security

for costs under s. 390 of the 1963 Act unless in that example it could show that it is likely to recover more than €100,000 damages? I

cannot help thinking that as the application of s. 390 of the 1963 Act in this manner could effectively stifle otherwise valid claims, the

Connaughton Road test itself may have to be re-visited in the light of the constitutional considerations I have just mentioned.

Conclusions

11. It follows, therefore, in the light of these comments and for all the reasons which Mahon J. will set out in his judgment that I

agree that the appeal should be allowed and the application for security for costs under s. 390 of the 1963 Act should be refused.