Supreme Court holds 'sufficient security' means an estimate of actual costs, not a discretionary sum for justice.

THE SUPREME COURT

128, 129 & 144/00

Denham J

Murphy J

Murray J

Hardiman J

Geoghegan J

Between:

Lismore Homes Limited

Appellant/Plaintiff

AND

Bank of Ireland Finance Limited, Deloitte Haskins & Sells,

Brendan Merry & Partners, PB Gunne (Dublin) Limited

AND Bernard Somers

Defendants/Respondents

Judgment of Mr Justice Francis D Murphy delivered the 5th day of October, 2001

The primary issue on this appeal concerns the proper construction of s.390 of the Companies Act, 1963, which provides as

follows:

“Where a limited 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 defence, require sufficient security to be given for those costs and may stay all

proceedings until the security is given.”

By orders dated the 2nd day of March, 1992, it was ordered that the Appellants (to whom I shall refer to as “Homes”) should

furnish security for the costs in this action of the first named Defendant (the “Bank”) and for the secondly named Defendants

(“Deloitte”) and the orders went on to provide that the security to be furnished should be determined by the Master of the High

Court. Those orders were made pursuant to the judgment delivered by Keane J (as he then was) on the 2nd day of March,

1992, and reported at [1992] IR 57. The issues in the case and the circumstances giving rise to it were fully explored in an

application which continued over four days.

As appears from the title to the report of the judgment, the action by Homes was closely related to another action by Lismore

Builders Limited (in receivership), to whom I shall refer as “Builders”, against the same Defendants. The involvement of both

Homes and Builders and the background to the proceedings brought by them as it appeared in 1992 was explained in the

opening paragraphs of the judgment of Keane J which, with adaptations to facilitate changes in nomenclature, I would quote as

follows:

“These two actions ...arise out of a housing development at Weston Park, Newcastle, County Dublin. The lands in

question had been bought by Homes ...and the construction of the 422 houses which were to be built was undertaken by

Builders. The only shareholders in both companies at all material times were Mr and Mrs James Kennedy. Finance for the

acquisition of the land and development were provided by the Bank and these advances were secured by deeds of

mortgage debenture over the assets and undertakings of both companies.

On the 17th February, 1989, the Bank sent letters to Homes and Builders demanding the repayment to them within 21

days of all amounts then outstanding. Following discussions with the companies, however, the Bank agreed to withdraw

the two letters of demand and provide further facilities to both companies on the terms set out in two letters both

addressed to them on the 28th February 1989, which terms were accepted by both companies .... That letter ...made

provision for the appointment and retention by the two companies of a financial controller, quantity surveyor and

auctioneer to be approved by the Bank. Subsequent to this agreement having been arrived at between the Bank and the

two companies Mr Matt McIlvenna of Deloitte, Brendan Merry & Partners and PB Gunne (Dublin) Limited, agreed to act in

those capacities.

On the 26th day of September 1989, the Bank appointed Bernard Somers, the fifthly named Defendant, as the receiver

and manager of all of the assets of both companies. Subsequent to his appointment, the receiver sold the principal

assets of both companies ie, the land and houses built thereon.

On the 20th and 25th April, 1990, the present actions were instituted by Homes and Builders in which claims for

damages for negligence and breach of contract were made against each of the defendants.”

In strongly contested proceedings there was at least agreement on two issues: one of fact and the other of law. As a matter

of fact it was agreed that neither Homes nor Builders would be able to meet an order for costs in the event of any of the

Defendants successfully defending the relevant action and, as a matter of law it was agreed that while the Court had a

discretion as to whether an order should be made under s.390 aforesaid the onus was on the Plaintiff in each case to show the

existence of special circumstances as to why the Court’s discretion should be exercised in its favour by refusing the application.

In Peppard & Co Ltd .v. Bogoff [1962] IR 180 the former Supreme Court, construing the corresponding section of the Companies

(Consolidation) Act 1908, had drawn attention to the burden falling on the plaintiff to show the existence of such special

circumstances and explored and upheld the argument of the plaintiff therein that his financial position was due, or would have

been due, to the very actions of the defendants for which they were being sued if the plaintiff succeeded in the proceedings.

The principle enunciated in Peppard & Co Ltd .v. Bogoff was applied and followed more recently in O’Toole (Jack) Ltd .v.

McKeown Kelly Associates [1986] IR 277; SEE Co Ltd .v. Public Lighting Serviced Ltd [1987] ILRM 255; Bula Ltd .v. Tara Mines

Ltd (no 3) [1987] IR 494 and Irish Commercial Society Ltd .v. Plunkett [1988] IR 1.

Whilst it does appear that the primary argument made by Homes (and indeed Builders) to Keane J was the contention that the

then financial position of the two companies was due to or caused by the wrong doings alleged against the Defendants in those

proceedings, a variety of arguments were put before the Court. It was pointed out that the applications for security for costs,

if successful, would have the effect of stifling the proceedings. It was submitted that the Defendants were guilty of delay in

bringing the application for security. It was urged that account should be taken of the possibility of Homes and Builders or one

or other of them succeeding in one action and thus being in a position to meet the costs of the other. All of these arguments

were rejected. The reasons for their rejection is not material at this stage. What is important is that the Court was invited to

explore in detail the impact of an order of security for costs on the Plaintiffs and, notwithstanding those arguments, directed

that security should be given. The amount of the security was not determined by the Master of the High Court as directed by

the order of Keane J dated 2nd March, 1982, but was, apparently by agreement between the parties, listed before Mr Justice

McCracken in the High Court. The delay in bringing the application was explained in part by the fact that Builders - but not

Homes - appealed the order of Mr Justice Keane directing security to be furnished by them in respect of the costs of the

Defendants other than the receiver. In their decision delivered on the 11th February, 1998, (and reported at [1999] 1 IR 501)

the Supreme Court allowed the appeal of Builders as against the Bank and Deloitte on the grounds that the Court was satisfied

that Builders had made out a prima facie case that the actions complained of in those proceedings - so far as the first two

Defendants were concerned - were or would have been the cause of its inability to pay the costs of the Defendants in the

event that they were successful in the proceedings. Whilst the appeal by Builders has no bearing on the present proceedings it

is significant - and perhaps alarming - to note that an interlocutory matter relating to the issue as to whether or not security

should be furnished was argued over a period of seven days.

The evidence before Mr Justice McCracken included, as might be expected, the advises of distinguished legal cost accountants.

Messrs Connolly Lowe, who were retained by Homes, estimated the total costs of the Bank in defending the proceedings at

£98,753. That assessment was made on their assumption and belief that the proceedings would be disposed of in eight days

and they provided for an instruction fee of £57,000. The brief fee for senior counsel (on the basis of only one senior retained)

was allowed at £5,250 and refreshers for senior at £2,100. The estimate made by Messrs Behan & Associates was a figure

between £792,999.74 and £797,999.74. The reasons for the wide disparity between the estimates made by the two firms of

experts can be readily identified though not easily explained. Messrs Behan & Associates anticipated that the trial would last for

40 days. He allowed for an instruction fee of £250,000 and brief fees for each of two senior counsel at £45,000. He took the

refresher fee of senior counsel at £2,500.

In the case of Deloitte the figures estimated by Messrs Connolly Lowe for their costs are again £95,077.50 whilst Messrs Behan

& Associates estimated a figure of £808,000. The increase over the estimate in the Bank’s cost being explained partly by the

need to retain certain experts.

In dealing with those figures Mr Justice McCracken held that a considerable amount of expert evidence by economists,

accountants, quantity surveyors and valuers would be required. He took the view that the case would take a considerable time.

In particular he said:-

“I certainly cannot see the case taking less than twenty hearing days, and probably more.”

He had no doubt that two senior counsel would be allowed on taxation for each of the Defendants and likewise he was satisfied

that there would be very substantial brief fees and instruction fees for the solicitors concerned. He summarised his conclusion

by saying:-

“I do not think that the costs of either the first or second named defendant, should they be successful, would tax at less

than £400,000.”

The learned Judge then ordered the Plaintiff to furnish security for costs to the Bank and Deloitte in a sum of £200,000 in

respect of each of them. The figure of £200,00, that is to say one half of the minimum estimate made by the learned trial Judge

as the costs of the respective Defendants, was stated by him to have been taken on the basis that the parties had agreed

that the amount to be allowed should be fifty percent of the total. It was disputed in this Court whether any such agreement

was made. However, whether it was made or not it seems reasonable that the learned Judge should make allowance - as he

was seeking to do - for the fact that two actions would be proceeding together, one by Homes in which they were required to

give security and the other by Builders who did not have the same obligations in that respect.

Both sides appealed the judgment of McCracken J: Homes on the basis that the amount fixed was excessive and the Bank and

Deloitte on the grounds that it was inadequate. However the issue with which the hearing before Mr Justice McCracken was

primarily concerned and the main grounds of appeal from the judgment related to the construction of s.390 aforesaid. Indeed it

may be convenient to set out the grounds of appeal which are as follows:-

“A The learned Trial Judge erred in Law and/or in fact in:

1 fixing the amount of security in the sum of £200,000.

2 determining that “sufficient security” in Section 390 of the Companies Act 1963 meant, and was understood to

mean, sufficient with reference only to the totality of the amounts claimed.

3 determining that “sufficient security” did not permit the Court to take into account all of the circumstances

including the financial condition of the Plaintiff.

4 determining that Section 390 of the Companies Act 1963 did not grant the Court any discretion in relation to the

amounts to be fixed in relation to the furnishing of security for costs.

5 failing to exercise his discretion in relation to fixing the amount to be furnished for security for costs.

6 determining that sufficient security can only mean complete security.

7 failing to hold that sufficient security means security of a sufficiency in all of the circumstances to be just.

8 holding that sufficient means sufficient “for those costs” without reference to all of the circumstances and thus is

in all the circumstances just.

9 ..........

10 ..........”

In Gibson .v. Coleman [1950] IR 50 that eminent jurist Dixon J, reviewed the authorities, one Irish, namely, Glen Ban Ltd .v.

Lefroy 77 ILTR 19 and the others from the United Kingdom, on the principle to be applied in determining the amount to be fixed

by way of security for costs. In the case heard by Dixon J, the claim for security was made under the then rules of the High

Court on the grounds that the plaintiffs were resident out of the jurisdiction. The practice of the Courts of Chancery before the

Judicature Acts had been to adopt an arbitrary practice of fixing the sum of £120 as security in every case. Undoubtedly that

practice had been discontinued and Dixon J held that it had been replaced in accordance with the High Court Rules where

appropriate and, in the case of insolvent companies by s.278 of the Companies (Consolidation) Act 1908 with a requirement to

fix an amount which would be realistic. As the learned Judge expressed it (at page 55 of the report):-

“I have said enough to indicate my view that the amount to be fixed should be such as to constitute what it purports to

be, namely, a security for the costs of the defendant, if successful, not merely an earnest of good faith or even a

security for part of those costs .... I can find no support for the view that the amount to be fixed should be less than a

fair and reasonable computation of the costs to which he (the defendant) would probably be put in defending the

action.”

Whilst Mr Justice Dixon was dealing with the case of individuals resident abroad he expressed the very firm view that the

amount of the security should be fixed in the same manner whether the plaintiff is a non resident or an insolvent company.

The decision in Gibson .v. Coleman was reviewed by the former Supreme Court in Thalle .v. Soares [1957] IR 182. In that case

the plaintiff (Thalle) claimed that he was entitled to a one half share in the successful sweepstakes ticket held by the first

named defendant (Soares). The other defendants were the trustees of the Hospital Trust (1940) Limited. Both Thalle and

Soares were resident outside the jurisdiction. Soares sought and obtained an order for security for costs which was measured

by the Master of the High Court in the sum of £2,500. On appeal to the High Court that figure was affirmed by O’Daly J applying

the principles enunciated in Gibson .v. Coleman. Once again the ancient history of security for costs was reviewed this time in

the learned Judgment of Kingsmill Moore J. The Supreme Court rejected the views of the Dixon J in the Gibson Case in two

crucial respects. First, the Court decided that security for costs fixed under Rules of Court was not required to meet the full

amount of the party and party costs of a successful defendant and, secondly, that a distinction was required to be drawn

between security fixed under the Rules and security determined for the purposes of the Companies Acts. As to the regulatory

provision Kingsmill Moore J said (at page 193):

“The significant feature of the 1876 rule, which for three quarters of a century has survived substantially unaltered

despite the scrutiny of so many rule-making committees, is its careful avoidance of any indication as to a measure

whereby the amount of security is to be gauged. Such indefiniteness cannot have been otherwise than deliberate. The

framers of the rule were perfectly aware of the Chancery rule of thumb and of the provisions in the Companies Act

1862. They chose not to follow such guidance. It seems to me that they and their successors left everything at large,

realising that the considerations which arose when the amount of security has to be fixed are so varied and so

numerous as to render dangerous any striving after precise direction. Security for costs must be so fixed as to advance

the ends of justice and not to hinder them. If the amount is too small a plaintiff with a speculative or even dishonest

case may be able to force a defendant into an unfavourable settlement by the threat of expensive litigation whose costs

may be irrecoverable: if too large a defendant may be able to defeat an honest and substantial claim because the

plaintiff cannot find the necessary security. Somewhere between Scylla and Charybdis a way has to be found but there

can be no Admiralty chart, no succinct sailing directions.”

The different jurisdictions had been contrasted at page 192 in the following terms:-

“The origin and history of the two jurisdictions are different, one being inherent and discretionary, the other statutory:

the foundations are different, one being based on the local character of jurisdiction, the other upon the nature of limited

liability: the underlying reasons are different, in one case possible unwillingness to pay, in the other presumptive inability.

These may be important distinctions rather than differences, rendered unimportant by the common feature that in each

case legal process is powerless to enforce payment. The deciding factor, to my mind, is the wording of the section

when contrasted with the rule. The statute lays down reasonably precise instructions as to the measure of security

while the rule makers and the judges seem studiously to have avoided any approach to definiteness, leaving each case

to be decided by an uncontrolled discretion. Those judges who have considered the matter appear to have realised that

different considerations applied to cases under the statute from the considerations relevant to cases under the inherent

jurisdiction.”

Thalle .v. Soares has been applied in this jurisdiction for nearly half a century. The Companies Act 1963 enacted within a

decade of that case reenacted the provisions of the Companies (Consolidation) Act 1908 and made provision in the same terms

as this Court had held “where reasonably precise instructions as to the measure of security”. In those circumstances it is clear

that Homes face a formidable task in this appeal.

Homes are entitled to say that the observations of Kingsmill Moore J insofar as they are related to the construction of s.278 of

the Companies Act 1908 (now s.390 of the Companies Act 1963) were obiter. This is undoubtedly so in as much as the case

before the Court concerned the individual Plaintiff and Defendant both of whom were resident outside the jurisdiction. Homes

then rely on a series of cases decided in the UK on the construction and application of s.726 of the UK Companies Act 1985

which is identical in its terms to s.390 of the relevant Irish Act. The UK cases relied on are Innovare Displays Plc .v. Corporate

Broking Services Ltd [1991] BCC 174; Roburn Construction Ltd .v. William Irwin (South) & Co Ltd [1991] BCC 726; Unisoft Group

Ltd (No 2) [1993] BCLC 532 and Keary Developments Ltd .v. Tarmac Construction Ltd [1995] 2 BCLC 400.

In the Innovare Case McCowan LJ having quoted s.726(1) of the UK Companies Act 1985 summarised the argument of counsel

(at page 179) in the following terms:-

“The important words, he says, are “sufficient security”. He argues that, if a judge is to order security at all, he must

order sufficient security, those being the words in the section.”

In relation to that argument the learned Judge expressed the following opinion:-

“However, the section does not mean, in my judgment, complete security. It can only mean security of a sufficiency in

all the circumstances of the case to be just. It was a matter for the judge’s discretion. It is apparent from part of the

judgment which I have cited in this judgment that he went into this matter with the greatest possible care and he

weighed up all of the arguments, both those on the side of the defendants as well as those on the side of the plaintiffs.

At the end of the day, I find it impossible to say that his exercises of discretion was plainly wrong. I am, therefore,

unpersuaded that there is anything wrong with the order which he made and I would dismiss the defendants’ appeal.”

Again, the decision of the Court of Appeal in England in Keary Developments .v. Tarmac Construction Ltd supports the

argument presented to this Court on behalf of Homes. That too is a case in which the Court had under consideration the

security to be provided by an insolvent company under s.726 of their Act of 1985.

Peter Gibson LJ in delivering his judgment said (at page 401):-

“The court in considering the amount of security that might be ordered will bear in mind that it can order any amount

up to the full amount claimed by way of security, provided that it is more than a simply nominal amount; it is not bound

to make an order of a substantial amount.”

In fact the amount of the security ordered to be furnished in that case was a sum of £100,000 notwithstanding the fact that

legal fees already incurred amounted to £115,000 and the future costs were estimated at between £170,000 and £225,000 plus

Value Added Tax.

Counsel for the Bank and Deloitte made certain criticisms of those and other UK decisions. It was pointed out that in the

Innovare and Roburn cases the attention of the Court did not appear to have been directed to earlier and important decisions.

Again, in relation to Roburn it was suggested that the reliance placed on the decision of the Court in Appeal in Sir Lindsay

Parkinson & Co Ltd .v. Triplan [1973] QP 609 was mistaken. In particular it was urged that the UK authorities did not - perhaps

because of a difference in procedures - draw an adequate distinction between the decision to direct security to be given and

the principles on which the amount of that security is to be assessed. I would not be competent to make any such analysis nor

do I believe that it would be appropriate for me to attempt it. Homes are entitled to say that there are numerous decisions of

the Court of Appeal in England, which are of high persuasive authority in this jurisdiction, supporting their contention that in

fixing the amount of the security, as well as in determining whether security should be required at all, the Court possesses, and

should exercise, a wide discretion.

I find myself in disagreement with the line of authorities which has grown up in the neighbouring jurisdiction in relation to the

proper interpretation and application of what is a statutory provision identical to our own. No matter what argument is made in

relation to justice or fairness in the UK or the constitutional right of access to the Courts in this jurisdiction I think that the

plain meaning of the words is clear. If the Court is satisfied that a limited company which is a plaintiff in an action will be unable

to pay the costs of the defendant if successful in his defence the Court may in its discretion require security to be given. If it

so decides then the security to be given is defined in the Act as “sufficient security to be given for those costs”.

If it transpired that the party and party costs of a successful defendant amounted to £100,000 could it be suggested that a

sum of £50,000 was sufficient security for those costs? The word “sufficient” in its plain meaning signifies adequate or enough

and it is directly related in the section to the defendants costs. The section does not provide - as it might have - a sufficient

sum “to meet the justice of the case” or some such phrase as would give a general discretion to the Court. Harsh though it

may be, I am convinced that “sufficient security” involves making a reasonable estimate or assessment of the actual costs

which it is anticipated that the defendant will have to meet. Much of the injustice which may be anticipated by the operation of

the section can be avoided by the application of the established principles in granting or withholding the order for security.

Insofar as the quantum of the security may be oppressive in a case where security is in fact ordered this must be seen in the

context in which it arises. It applies only to limited liability companies who are shown to be insolvent. Legislation has conferred

many benefits on limited liability companies including, in particular, that very limitation and it is not surprising to find that some

burdens are likewise cast by the Legislature on corporators who enjoy those advantages. It is with hesitation that I disagree

with the conclusions reached by the Court of Appeal in England but I am greatly comforted to find myself in full agreement with

the views expressed by Kingsmill Moore J in Thalle .v. Soares so many years ago.

As to the quantum: there is difficulty enough in taxing costs which have been incurred. It is well nigh impossible to estimate the

costs of the hearing of an action which has been ten years in gestation and shows all the signs that a further ten years will

elapse before a trial sees the light of day. The comments made by McCracken J on the figures are brief but full of wisdom. His

assessment of what has happened and what may happen and what the probable costs will be seems to me as close as one

could come to a reasonable estimate of the party and party costs involved. It was argued on behalf of Deloitte that the learned

trial Judge having said that the case would take at least twenty days should have allowed more than twenty refreshers. I think

that argument is seeking to impose a degree of precision on an exercise which does not admit of it. I think that the figure found

by the learned trial Judge is as realistic an assessment as could be made. I would dismiss the appeal on all grounds and I would

likewise dismiss the cross-appeal.