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Companies Act: security for costs
PRACTICE AREA GROUP: Commercial Litigation and Dispute Resolution
Under Irish law, as a general rule, costs typically follow the event such that the winning party recovers its party and party costs from the unsuccessful party. Where a defendant believes that a plaintiff has brought unmeritorious proceedings and is concerned that the plaintiff may be unable to meet any costs order against it in the event that it succeeds at trial, it may seek security for its costs from the plaintiff as a condition of proceeding with the claim.
Although the granting of security for costs is strictly controlled, in the right case such an application can be a useful weapon in the armoury of a defendant. While court rules govern the general jurisdiction of the courts to make such orders (1), a statutory jurisdiction is afforded to defendants where the plaintiff is a company. The recent High Court decision in County Monaghan Anti-Pylon Ltd v Eirgrid plc (2) has reiterated the test applicable under that legislation.
The statutory basis for security for costs is detailed at Section 390 of the Companies Act 1963:
"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."
The plaintiff started as a committee of objectors, which later incorporated as the plaintiff company. The defendant applied for planning permission for an infrastructure project and the matter ultimately proceeded to an oral planning hearing. That hearing went on for some time before the defendant announced that it could proceed no further – there had been an error in the relevant newspaper announcements regarding the planning sought and the application was withdrawn. The plaintiff claimed that it had raised and spent – both pre and post-incorporation – some €250,000 in preparing for and participating in the oral hearing, which it could not recover and repay to the original donors. On that basis, it brought the instant proceedings, which were premised on the argument that a duty of care was owed to objectors not to waste time and money participating in a planning process which was terminated due to the applicant's own negligence, thereby causing loss. The defendant sought security for costs of the proceedings.
The court held that making an order for security for a defendant's costs against a company is a matter of discretion that is exercised based upon settled principles. It noted that the defendant must show that:
- it has a reasonably sustainable defence; and
- the plaintiff company either is insolvent or is so financially challenged that it will be unable to pay the defendant's costs if the defendant is successful.
In this regard, the court acknowledged that the latter point was conceded. As a consequence, it was the former point which was central to the application.
In considering the law, the court referred to the "useful guidance" of Justice Finlay Geoghegan in Tribune Newspapers (In Receivership) v Associated Newspapers Ireland,(3) where she set out the following propositions:
"a defendant seeking to establish a prima facie defence which is based on fact must objectively demonstrate the existence of evidence upon which he will rely to establish these facts. Mere assertion will not suffice... Further, the defendant must establish an arguable legal basis for the inferences or conclusions which it submits the court may arrive at based upon such evidence. In so far as the plaintiff is admitting that the appropriate test includes an assessment by this Court on the application for security for costs as to whether the defence contended for is likely to succeed at the full hearing or even has a good prospect of succeeding, I reject that submission. Such an exercise would inevitably require the court at the interlocutory stage of the application for security for costs to assess the strength and weakness of the respective parties' contentions and cases. [W]hat is required for a defendant seeking to establish a prima facie defence is to objectively demonstrate the existence of admissible evidence and relevant arguable legal submissions applicable thereto which, if accepted by the trial judge, provide a defence to the plaintiff's claim."
In expressly adopting that reasoning, the court commented that in order to satisfy the test, a defendant requires a reasonably sustainable defence. If that defence is one of fact, it must demonstrate that if what it alleges in answer to the plaintiff is proven in court, this will defeat the plaintiff's case. If the defence is a legal one, it must demonstrate that this is potentially sustainable on a practical view of the law.
Notwithstanding these basic principles which are relevant to the award of security for costs against a company, the court also outlined special circumstances that can arise whereby discretion might be exercised to decline security for costs. The court noted, for example, that Irish Commercial Society Ltd v Plunkett(4) is authority for the proposition that a court may consider the strength of the plaintiff's claim and the conduct of the applicant seeking security for costs. The court also went on to identify five other non-exhaustive circumstances that can bear upon the exercise of the discretion:
- whether the damage sustained in terms of the damaged solvency was sustained as a consequence of the actions of the defendant;(5)
- whether there has been a delay in bringing the security for costs application;(6)
- whether a point of law for decision is so important that the progress of the case should not be interrupted by making an order for security for costs;(7)
- whether there is a co-plaintiff against which any costs order can be exercised;(8) and
- whether a point of national importance can arise (which the court accepted is rare in private litigation) (9)
In considering the application, the court rejected an initial argument that the plaintiff had suffered no loss. Although the filed accounts of the plaintiff showed no income or expenditure for the relevant period and no assets, there was sworn evidence in significant detail as to the expenditure related to the abandoned oral hearing.
The court further noted that the special circumstance typically applied in cases such as this is ruination of the plaintiff by the actions of the defendant, which it said embraces not only commercial damage, but also whether the plaintiff can pursue the purpose for which it was established. The court also stated that, arguably, companies formed for participation in planning hearings should not be judged on the same basis as economic undertakings. However, the court said that democratic participation in physical development is at the heart of the planning code in Ireland and, in exercising the special circumstance it identified, it exercised its discretion to refuse security for costs.
The decision represents a restatement of the test for granting security for costs under Section 390 of the Companies Act. The specific listing of the special circumstances is also helpful, even if the application of the special circumstance in terms of refusal of the application as was applied here may be considered quite case specific. However, successful security for cost applications in environmental and planning matters are rare.
(1) See, in particular, Rules of the Superior Courts, Order 29.
(2)  IEHC 103.
(3) High Court, unreported, March 25 2011.
(4)  IR 1.
(5) Usk and District Residents Association Limited v Environmental Protection Agency,  ILRM 363.
(6) SEE Co Ltd v Public Lighting Services Ltd,  ILRM 255.
(7) A point of law must be identified which transcends the interests of the parties and is for the benefit of the community as a whole – Lancefort v An Bord Pleanala,  2 IR 511.
(8) Peppard v Bogoff,  IR 180.
(9) Millstream Recycling v Tierney,  IEHC 55.