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'Security Blankets' for Defendants

15 August 2018
This article looks at a recent High Court decision to make a security for costs Order against an insolvent plaintiff company and what defendants (and their insurers) can learn from the written judgment that was handed down

The recent judgment of Ms Justice Uná Ní Raifeartaigh in the case of Demeray Limited v O'Gradys Solicitors will be of interest to defendants and their insurers, when dealing with claims taken by insolvent companies.

The proceedings relate to a claim that the Defendant firm of solicitors ("OGS") were negligent while acting on behalf of the Plaintiff company ("Demeray") in the sale of four apartments which resulted in the sales being lost.

Background

The events giving rise to this claim took place in the period between 2006 and 2008, when OGS were instructed to act in the sale of apartments on behalf of Demeray. The proceedings were issued on 31 October 2012, however, no Statement of Claim was delivered until February 2015 as the company was in receivership (by appointment of Ulster Bank Limited from outstanding loans) in the interim. A Defence was delivered in June 2016. In November 2016, the motion for security for costs was issued.

Law on security for costs

Section 52 of the Companies Act 2014 provides as follows: "Where a company is plaintiff in any action of legal proceedings, 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 or her defence, require a security to be given for those costs and may stay all proceedings until the security is given." When applying this section, the Court has discretion and the onus on the defendant to establish that:

  1. it has a prima facie defence; and
  2. the plaintiff will not be able to pay the defendant's costs if successful in the defence.

If these two requirements are met, the Court should make the Order unless it can be shown that there are specific circumstances which would cause the Court to exercise its discretion not to make the Order sought. Such special circumstances include a delay on the part of the party applying for security and/or the plaintiff's inability to discharge the defendant's costs arising from a wrong allegedly committed by the party seeking security.

The law – applied

Applying these principles to the case, the Court found:

  1. There was "no dispute … but that the Plaintiff Company is impecunious; it is an insolvent company as is clear from the company accounts exhibited to the Court".
  2. While it was not necessary for the Judge to express a view on the strength of the Defence, "sufficient evidence was put before the Court to establish that the Defendant had a bona fides Defence within the meaning of that concept as deployed in applications for security for costs".

The Plaintiff sought to persuade the Court that it should use its discretion not to make the Order. Specifically, it said (i) that the overall effect of the Defendant's negligence was to destroy the Plaintiff's relationship with Ulster Bank Limited, as a result of which the Plaintiff became insolvent, and (ii) there was delay by the Defendant in bringing the motion for security for costs.

In relation to the first of these points, the Judge said that "the causal link now alleged [i.e. the link between the Defendant's alleged negligence and the Plaintiff Company's insolvency] in response to the application for security for costs does not correspond with the case as pleaded in the Statement of Claim. The Statement of Claim does not plead the negligence of the Defendant caused the company to fail but simply pleads the (considerably smaller) loss arising out of the loss of the sale of the four apartments".

In relation to the allegation of delay, the Judge concluded that refusing the application for security for costs on the grounds of delay would be "a disproportionate response in light of the history of the proceedings". She said that there had been delay on both sides and that this was "not a "black and white" situation of the Plaintiff moving the case forward with expedition against the Defendant who did little or nothing until a very late stage".

 She then made an Order directing a security for costs and, following submissions, fixed the costs at two-thirds of the security sought. If the Plaintiff fails to comply with the Order (and it is difficult to see how an insolvent company could), the proceedings will be stayed indefinitely unless or until the security is provided.

Conclusion

The Irish Courts have had a reputation for being pro-plaintiff, however recent cases such as this one shows that they are starting to strike a better balance between plaintiffs and defendants, particularly where both are commercial entities.

In light of this decision, defendants (and their insurers) should continually assess the financial strength of plaintiff companies to see whether there is an opportunity to bring a successful security for costs application as soon as the circumstances arise.

(DWF acted for the Defendant in the security for costs application)

Further Reading

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