DISCLOSURE OF DEFENDANT’S SOLVENCY: ADVERSE ASSUMPTIONS CAN BE MADE IN THE ABSENCE OF EVIDENCE

The case of Sarpd Oil International Limited -v- Addax Energy SA [2016] EWCA Civ 120 related to the practice of awarding security for costs by an overseas company which did not have to file accounts. The case raises other points here I want to look at the overriding objective and the presumptions the court can make if no information is forthcoming in relation to the assets of a company.

KEY POINTS

  • It is wholly appropriate for a court to make presumptions against a company that does not disclose its assets when there is no publicly available evidence as to its solvency.
  • The company may not be under an obligation under CPR 1.3 to disclose its solvency. However such an omission forms part of the overall picture which the court is entitled to take into account.

THE CASE

The Court of Appeal allowed the defendant’s appeal against a refusal to award security for costs.  The judge at first instance

“The judge held on that state of the evidence that there was no reason to believe that Sarpd would be unable to pay Addax’s costs if ordered to do so. He said that the obvious explanation for Sarpd’s reticence about its financial position was that it would benefit in settlement negotiations from Addax’s doubt about whether it would recover its costs even if it defeated the claim. But that was no reason to suppose that they could not pay the costs if it lost. He added that he suspected it had become the practice of the Commercial Court to order security for costs in circumstances where a company had not filed publicly available accounts, had no discernible assets and declined to reveal its financial position; but, if such practice had developed, it was not justified and he would not follow it”
REJECTION OF THIS APPROACH BY THE COURT OF APPEAL
  1. We consider, with all due respect to the judge, that he was plainly wrong. If a company is given every opportunity to show that it can pay a defendant’s costs and deliberately refuses to do so there is, in our view, every reason to believe that, if and when it is required to pay a defendant’s costs, it will be unable to do so. The judge said that the obvious explanation of the refusal was that Sarpd wanted, for the purposes of settlement negotiations, to leave Addax in doubt about whether it would recover its costs, even if it defeated the claim. But the thinking behind that is that it is permissible for Sarpd to give Addax reason to believe it will be unable to recover it costs but at the same time assert that there is no reason for the court so to believe. That is illogical and unacceptable.
  2. Mr Nolan’s alternative explanation in oral argument was that Sarpd might just want to keep its financial position confidential for business reasons. But as Sales LJ pointed out, arrangements can always be made by the court if a litigant has legitimate business reasons for keeping something confidential. No application was made for the court to sit in private or to avoid referring in public to relevant financial amounts.
  3. Mr Nolan may be right to say that CPR Part 1.3 does not require a respondent voluntarily to fill gaps in an applicant’s evidence in order to assist an applicant to discharge a burden of proof. But even if deliberate reticence on the part of a respondent is not a breach of CPR Part 1.3 a court can and should take account of deliberate reticence as part of the overall picture. Any evaluation has to be made on the totality of the evidence before the court; part of that totality is the absence of relevant evidence from the only party who is able to provide it. If, therefore, there were to be a practice of the Commercial Court (as to which we cannot express a view from our own experience) that security for costs will often be granted against a foreign company who is not obliged to publish accounts, has no discernible assets and declines to reveal anything about its financial position, our view is that the practice is a sound one and, as Lewison LJ noted, it is an important point of practice which should either be upheld or rejected at appellate level. We would uphold it.”

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