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Coolbrook Developments Ltd. v Lington Development Ltd & anor
Factual and Procedural Background
The proceedings arise from a dispute between Plaintiff and Defendants, Company A and Company B, concerning the sale by Company A to Company B of a 25% interest in a commercial property (the "Property") located in The City in February 2017. Prior to the sale, the Property was owned by Plaintiff (50%), Company A (25%), and another company, Percy Nominees Ltd ("Percy") (25%). Plaintiff acquired Percy's 25% interest in March 2017, increasing its interest to 75%. Plaintiff challenges the sale by Company A to Company B, alleging breaches of an Owners' Agreement dated 23 February 2011 regulating the relationship between the owners.
The proceedings commenced by plenary summons issued by Plaintiff against Company A on 13 February 2017. Company B was joined as co-defendant on 24 July 2017, and the summons was amended accordingly. Plaintiff delivered a statement of claim on 28 July 2017. Defences were delivered by both Company A and Company B on 8 December 2017. The claims include allegations that Company A breached the Owners' Agreement by failing to market its interest properly and wrongfully selling to a connected entity, Company B, rather than an arm's length third party. Plaintiff also alleges breaches of good faith, breach of confidence, conspiracy, and wrongful interference with contractual rights against both defendants, and unjust enrichment against Company B alone.
Due to concerns about Plaintiff's financial position, both defendants requested security for costs. Plaintiff refused, leading to applications by Company A and Company B for security for costs pursuant to section 52 of the Companies Act 2014 (the "2014 Act"). The applications seek orders directing Plaintiff to provide security for costs, determining the form and amount of such security, and staying proceedings until security is provided.
Legal Issues Presented
- Whether Company A and Company B have established that there is reason to believe that Plaintiff will be unable to pay their costs if successful in defending the proceedings;
- If security for costs is to be ordered, the amount of security that Plaintiff should be directed to provide.
Arguments of the Parties
Defendants' Arguments
- Company A and Company B contend they have a prima facie defence to Plaintiff’s claims.
- They argue there is reason to believe Plaintiff will be unable to pay their costs if successful in defence, based on Plaintiff’s financial statements and evidence of substantial liabilities.
- They seek security for costs equal to their estimated legal costs as provided by legal costs accountants.
- They reject the "one third rule" or practice as a binding principle and assert the court has discretion to order full security.
Plaintiff's Arguments
- Plaintiff concedes the defendants’ prima facie defence but disputes that there is reason to believe it cannot pay defendants’ costs.
- It does not rely on any special circumstances to resist security for costs.
- Offers to lodge €250,000 in escrow as appropriate security, representing roughly one third of defendants’ estimated costs.
- Supports application of the "one third rule" as a practice for fixing security amounts.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Usk and District Residents Association v. Environmental Protection Agency [2006] IESC 1 | Test for security for costs under Companies Act provisions: (1) prima facie defence, (2) reason to believe plaintiff cannot pay costs. | Adopted as the appropriate test for security for costs under s. 52 of the 2014 Act. |
| Inter Finance Group Ltd v. KPMG Peat Marwick [1998] IEHC 217 | Summary of test for security for costs against corporate plaintiffs. | Reinforced the test applied in Usk. |
| Connaughton Road Construction Ltd v. Laing O'Rourke (Ireland) Limited [2009] IEHC 7 | Application of security for costs test in High Court. | Confirmed the test and approach for security for costs. |
| IBB Internet Services Ltd v. Motorola Ltd [2013] IESC 53 | Interpretation of "credible testimony" and "reason to believe" standard for security for costs. | Clarified that "reason to believe" requires more than a mere risk but less than balance of probabilities. |
| Jirehouse Capital & anor. v. Beller & anor. [2009] 1 WLR 751 | Interpretation of "reason to believe" standard. | Supported the approach adopted in IBB for assessing future ability to pay costs. |
| Flannery and Lexington Services Ltd v. Walters & Ors [2015] IECA 147 | Application and interpretation of security for costs test and consideration of financial statements. | Applied the "reason to believe" standard and emphasized the need to consider all material evidence. |
| Bula Ltd (In Receivership) v. Tara Mines (No.3) [1987] I.R. 494 | Practical approach to evidence required to justify security for costs. | Confirmed that credible evidence of financial difficulty is sufficient without detailed asset/liability analysis. |
| Hedgecroft Ltd t/a Beary Capital Partners v. HTREMFTA Ltd & Ors [2017] IEHC 275 | Relevance of company accounts in assessing ability to pay costs. | Accounts showing small surplus or deficits require caution in assessing ability to pay. |
| Fides Capital Ltd v. Alchemy Projects Ltd [2017] IEHC 266 | Financial statements as key evidence of inability to pay costs. | Found company unlikely to meet costs based on accounts and lack of evidence of improvement. |
| Parolen Ltd v. Doherty & Anor [2010] IEHC 71 | Principle that unexplained financial uncertainties should not be resolved in favour of the company. | Applied to security for costs assessment. |
| James Elliott Construction Ltd v. Irish Asphalt Ltd [2010] IEHC 234 | Requirement for company to explain financial position to avoid adverse inference. | Applied principle that unexplained gaps weigh against company resisting security for costs. |
| Farrell v. Governor and Company of the Bank of Ireland & ors [2012] IESC 42 | Balancing defendant’s right to recover costs and plaintiff’s right to fair litigation. | Guided court’s discretion in fixing amount of security for costs. |
| Thalle v. Soares [1957] I.R. 182 | Security for costs not intended as indemnity for all costs nor encouragement of luxurious litigation. | Referenced in assessing appropriate amount of security. |
| Fallon v. An Bord Pleanála [1992] 2 I.R. 380 | Considerations in security for costs orders. | Referenced in relation to the "one third rule" practice. |
| Harlequin Property (SVG) Limited & anor v. O'Halloran [2012] IEHC 13 | Questioning the origin and applicability of the "one third rule". | Referenced in the court’s analysis of discretion in fixing security amounts. |
| Werdna v. MD Insurance Services Limited t/a "Premier Guarantee" [2018] IEHC 194 | Discretion in fixing amount of security under s. 52 of 2014 Act; treatment of VAT. | Supported broad discretion and rejection of binding one third rule. |
| Lismore Homes Limited v. Bank of Ireland Finance Limited (No. 2) [1999] 1 I.R. 501 | Interpretation of "sufficient security" under s. 390 of 1963 Act. | Previously required full security; distinguished from s. 52 of 2014 Act. |
| Framus Ltd v. CRH plc [2004] 2 IR 20 | Security for costs must balance justice, not be full indemnity nor token amount. | Referenced in determining appropriate security amount. |
| Valebrook Developments Ltd (In Receivership) v. Keelgrove Properties Ltd [2011] IEHC 173 | Consideration of multiple defendants in fixing security amount. | Referenced in relation to discretion and proportionality. |
| Hot Radio Co. Ltd. t/a Pulse FM v. IRTC [2000] IESC 55 | Relevance of plaintiff’s ability to proceed if full security ordered. | Considered in balancing interests in fixing security amount. |
Court's Reasoning and Analysis
The court applied the established test under section 52 of the 2014 Act, requiring that an applicant for security for costs must establish (1) a prima facie defence to the plaintiff’s claim and (2) reason to believe that the plaintiff will be unable to pay the defendant's costs if successful in defending the proceedings. Plaintiff conceded the first element but contested the second.
The court analyzed the financial evidence, including Plaintiff’s most recent publicly available accounts for 2015 and 2016, which disclosed net current assets of just €2 and failed to show any income or revenue stream. Plaintiff’s substantial liabilities to a lender (Dengrove DAC) were undisclosed in detail, but it was established that Plaintiff’s interests in the Property were fully charged and secured in favour of Dengrove. Plaintiff’s assertion of being “robustly solvent” was unsupported by credible evidence.
The court found Plaintiff’s offer to lodge €250,000 in escrow inadequate and unsupported by evidence of source. The conditional and equivocal letter from Dengrove’s solicitors further undermined Plaintiff’s case that rental income would be available to meet costs orders, as it contained no binding commitment and was subject to multiple contingencies.
Applying the standard of “reason to believe” as requiring something significantly greater than a mere risk, the court concluded that credible testimony established a reason to believe Plaintiff would be unable to pay defendants’ costs if successful in defence.
Regarding the amount of security, the court considered the discretion afforded by the omission of the word “sufficient” in s. 52 compared to the previous s. 390 of the 1963 Act. The court rejected the automatic application of the “one third rule” or practice as a binding principle and emphasized the need to balance the defendant’s right to recover costs and the plaintiff’s right to fair litigation.
Having regard to the evidence, including the disparity between defendants’ estimated costs and Plaintiff’s financial position, the court found it appropriate to order security for costs equal to the full amount of Company A’s estimated costs (€400,828 excluding VAT) for both defendants, noting that VAT should be excluded as defendants are VAT registered. The court also noted that Plaintiff did not aver inability to proceed if full security were ordered, which weighed in favor of ordering full security.
Holding and Implications
The court ORDERED as follows:
- That Plaintiff provide security for costs to both Company A and Company B pursuant to s. 52 of the 2014 Act.
- The amount of security for costs to be provided by Plaintiff to each defendant is €400,828, exclusive of VAT.
- Plaintiff must provide the security within a time to be agreed or fixed by the court.
- The proceedings against the defendants are stayed until the security for costs is provided.
- Further orders may be made following discussions with counsel.
The direct effect of this decision is that Plaintiff must secure defendants’ costs before proceeding, protecting defendants from the risk of unrecoverable costs due to Plaintiff’s financial position. No new legal precedent was established beyond clarification of the court’s discretion under s. 52 to depart from the “one third rule” and the application of the “reason to believe” standard in assessing inability to pay costs.
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