Flannery & Anor v Walters & Ors, Irish Court of Appeal, Judgment, Law, casemine.com

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Finlay Geoghegan J.

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Flannery & Anor v. Walters & Ors

Smart Summary

Factual and Procedural Background

This judgment arises from two separate appeals against a High Court judgment and supplementary judgment concerning security for costs in litigation involving multiple parties. The High Court had refused the defendants' application requiring the plaintiffs to provide security for costs, while ordering the counterclaim plaintiff, a company registered in Malta, to furnish security for costs related to its counterclaim. The appeals challenge these decisions, including the amount and manner of security to be furnished. The substantive dispute concerns ownership of certain patents and related agreements. The plaintiffs include an individual resident outside the EU and a company registered within the EU, while the defendants and counterclaim parties include individuals and companies involved in the patent dispute.

Legal Issues Presented

Whether the High Court erred in refusing the defendants' application for security for costs against the plaintiffs, particularly the company registered in Malta, given the evidence of its financial position.
Whether the High Court was correct in ordering the counterclaim plaintiff to provide security for costs, including the court's jurisdiction to make such an order against a counterclaimant and the application of section 390 of the Companies Act 1963.
Whether the amount of security ordered against the counterclaim plaintiff was appropriate, including the applicability of the so-called "one third rule" and the court's discretion to depart from it.
Whether the court should have ordered security for costs on a phased basis for the counterclaim plaintiff.

Arguments of the Parties

Defendants' Arguments

The High Court erred by relying solely on the positive net asset position shown in the plaintiffs' financial statements without considering whether there was reason to believe the company would be unable to pay costs if ordered.
The existence of a positive net asset position does not negate a reason to believe insolvency risk, especially given the nature of the business and the composition of the assets.
The financial statements disclosed that the company was not trading, had no income or profits, and held assets such as unsecured, interest-free receivables with no fixed repayment terms, raising serious concerns about its ability to pay costs.
They relied on established case law emphasizing that unexplained uncertainties in financial statements should not be resolved in favor of the company.

Plaintiffs' Arguments

The financial statements and auditors' reports confirmed the company's solvency and ability to pay debts as they fall due.
The auditors' notes on accounting policies and impairment were relied on to support the conclusion that the financial statements gave a true and fair view of the company's financial position.
There was no expert evidence from the defendants challenging the financial statements.

Counterclaim Plaintiff's Arguments

Disputed insolvency, supported by a statement of financial affairs showing assets exceeding liabilities and funding obligations from a third party.
Argued that funding obligations would cover costs, and thus no credible evidence existed to justify an order for security for costs.
Contended that security for costs should not be ordered on a phased basis.

Counterclaim Defendants' Arguments

Submitted credible evidence that the counterclaim plaintiff was unable to pay costs if ordered, based on financial statements and a funding requirement document describing insolvency.
Argued that the funding obligations of the third party did not extend to covering costs awarded against the counterclaim plaintiff.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bula Limited (In receivership) and Others v. Tara Mines and Others (No. 3) [1987] I.R. 494	Test for security for costs under s. 390 Companies Act 1963 requiring credible testimony of reason to believe inability to pay costs.	Cited to explain the threshold test and that credible evidence may include failure to pay creditors over time.
James Elliott Construction Limited v. Irish Asphalt Limited [2010] IEHC 234	Principle that unexplained uncertainties in financial statements should be construed against the company applying for security for costs.	Applied to hold that the company must explain financial uncertainties or risk adverse inference.
I.B.B. Internet Services Limited and Others v. Motorola Limited [2013] IESC 53	Clarification of the "reason to believe" test, rejecting balance of probabilities and requiring consideration of material evidence and likelihood.	Adopted to guide assessment of evidence and the level of likelihood required for ordering security for costs.
New Fenix Compagnie Anonyme D’Assurance de Madrid v. General Accident Fire and Life Assurance Corporation Limited [1911] 2 KB 619	Principles on court's jurisdiction to order security for costs against defendants who bring counterclaims or cross-actions.	Applied to determine that counterclaim plaintiff may be ordered to provide security for costs if counterclaim constitutes a fresh action.
The Silver Fir [1980] 1 Lloyd's Rep. 371	Reinforces principles regarding security for costs in relation to claims and counterclaims arising from the same subject matter.	Supported the trial judge’s conclusion on jurisdiction to order security against counterclaim plaintiff.
Ticket Generator Limited v. Dublin Airport Authority [2012] IEHC 216	Discussion of the "one third rule" as a default for setting security for costs.	Considered in relation to the amount of security to be ordered; trial judge not bound by the rule.
Harlequin Property (SVG) Limited v. O’Halloran [2012] IEHC 13	Discretionary approach to setting amount of security for costs, allowing departure from the "one third rule".	Referenced to support the trial judge’s discretion in fixing full security amount.
Goode Concrete v. CRH plc and Others [2012] IEHC 198	Further support for discretionary approach to security for costs.	Referred to in submissions on appropriate security amount.
Thalle v. Soares & Others [1957] I.R. 182	Practice suggesting one third of estimated costs as security for costs.	Discussed as part of the jurisprudence on security for costs amounts.
Fallon v. An Bord Pleanla [1992] 2 I.R. 380	Appeal case touching on security for costs practice.	Considered in the context of security for costs amount principles.
Framus Limited v. CRH plc [2004] 2 IR 20	Clarified discretion of courts in ordering security for costs and the "one third rule".	Central to reasoning on amount of security ordered.
Farrell v. Bank of Ireland [2013] 2 ILRM 183, [2012] IESC 42	Confirmed discretion to depart from one third rule and balanced approach to security for costs.	Supported trial judge’s discretion to order full security amount against a company outside jurisdiction but within EU.
Parolen Ltd v. Doherty [2010] IEHC 71	Consideration of solvency in light of asset deficits and ability to meet debts as they fall due.	Referenced in relation to assessing financial statements and solvency.
Jirehouse Capital and Another v. Beller and Another [2009] 1 WLR 751	Interpretation of "reason to believe" test for security for costs.	Adopted to reject balance of probabilities test and clarify evidential standard.

Court's Reasoning and Analysis

The Court of Appeal considered each appeal separately, applying established legal principles and relevant case law. Regarding the defendants' appeal, the court found that the High Court erred by focusing solely on the positive net asset position of the plaintiff company without sufficiently considering the broader financial context disclosed in the financial statements. The Court emphasized that the test under section 390 of the Companies Act 1963 requires credible testimony that there is reason to believe the company will be unable to pay costs if ordered. The financial statements showed the company was not trading, had no income or profits, and held assets that were unsecured and without fixed repayment terms, raising significant concerns about its ability to pay costs. The Court applied the principle that unexplained uncertainties in financial evidence should be resolved against the company seeking to avoid security for costs. Consequently, it held there was reason to believe the company might be unable to pay costs, justifying an order for security for costs against both plaintiffs, including the individual plaintiff who was not resident within the EU.

In relation to the appeal by the counterclaim plaintiff, the Court agreed with the High Court that the nature of the counterclaim, which added new parties and claims beyond mere defence, justified the court's jurisdiction to order security for costs. The Court accepted the trial judge's conclusion that credible evidence showed the counterclaim plaintiff was unable to meet costs if ordered. It rejected the argument that the funding obligations of a third party extended to covering such costs, finding no clear evidence of such an arrangement. On the amount of security, the Court endorsed the trial judge's discretion to depart from the "one third rule" and order the full estimated costs as security, noting the importance of consistency and equality in treatment of companies regardless of jurisdiction within the EU. Finally, the Court found no basis to require the security order to be phased, as no significant "watershed event" was evident that would materially affect costs during the litigation.

Holding and Implications

The Court of Appeal made the following rulings:

The defendants' appeal was allowed: The Court ordered that the plaintiffs provide security for costs, including the individual plaintiff, due to credible evidence indicating a risk that the company plaintiff would be unable to pay costs if ordered.
The counterclaim plaintiff's appeal was dismissed: The Court upheld the High Court's order requiring the counterclaim plaintiff to furnish security for costs, including the amount fixed by the trial judge, and rejected the request for phased security payments.

The direct effect is that security for costs must be furnished by the plaintiffs and the counterclaim plaintiff as ordered. No new legal precedent was established beyond the application and clarification of existing principles concerning security for costs, jurisdiction over counterclaims, and the discretion in setting security amounts. The judgment reinforces the requirement for companies seeking to avoid security for costs to provide clear and credible evidence about their financial ability to meet adverse costs orders.