PROVING THINGS 38: PROVING INABILITY TO PAY ON A SECURITY FOR COSTS APPLICATION

A party opposing an application for security costs sometimes has to argue that the ordering of security would “stifle” a genuine claim.  This means giving evidence as to that party’s inability to pay.  This test was considered by Mr Richard Salter QC in Eminent Energy Limited -v- KRassik Ou [2016] EWHC 2585 (Comm). It is an important lesson in the detail that a party must bring to court to prove inability to pay.

“Mr Weller’s vague assertion of “limited funds, all of which have been earmarked to pay its own legal costs in these proceedings, and also in the various proceedings underway in Estonia” does not even get close to providing the full and frank disclosure that is required in circumstances such as this.”

THE CASE

The claimant was applying for security for costs on a counterclaim.  The defendant opposed the application. One of the grounds put forward was that the application would stifle a genuine claim.  It was, therefore, incumbent on the defendant, to adduce evidence of its inability to pay.

THE JUDGMENT
  1.  to the second limb, it is well-established that a party who wishes the Court to conclude that an order for security will have the effect of stifling a claim must put before the court full and frank evidence as to its means; and to that end:
.. That means that, in all but the most unusual cases, the burden lies on [the party resisting an order for security] to show, quite apart from the question of whether the company’s own means are sufficient to meet an order for security, that there will be no prospect of funds being available or forthcoming from any outside source such as a creditor, principal shareholder or other party whose interests are affected ..[4]
  1. The evidence to support the argument that the effect of making an order for security against Daxin Baltic would be to prevent it from prosecuting its claim is contained in paragraphs 24 to 26 of Mr Weller’s affidavit. According to Mr Weller:
.. Daxin Baltic has limited funds, all of which have been earmarked to pay its own legal costs in these proceedings, and also in the various proceedings underway in Estonia .. No further funds are available to Daxin Baltic, at least at the present time, therefore if a security for costs order was made against Daxin Baltic, it would be unable to satisfy that order.
That leaves the question as to whether, notwithstanding its own position, Daxin Baltic has reasonable access to alternative sources of funding which would allow it to meet an order for security for costs .. The answer to this is that Daxin Baltic does not.
.. [I]t is suggested that the Daxin Group would be able to provide the monies necessary for Daxin Baltic to comply with any order for security that the Court may make. This is not the case. The fraud that has been perpetrated on Daxin Baltic has also resulted in huge losses for Daxin Petroleum (and therefore, a potential claim by Daxin Petroleum against Daxin Baltic). In light of this, Daxin Baltic currently has no expectation that Daxin Baltic will obtain funds from either Daxin Petroleum or any company in the Daxin Group ..
  1. In my judgment, that evidence fails to discharge the evidential burden on Daxin Baltic.
18.1 First of all, Daxin Baltic has failed to provide any satisfactory up-to-date evidence as to its own means. The most recent evidence before the court is contained in Daxin Baltic’s Consolidated Annual Report for the accounting year ended 31 December 2014. No attempt has been made to put more up-to-date figures (perhaps in the form of Management Accounts) before the court. Mr Weller’s vague assertion of “limited funds, all of which have been earmarked to pay its own legal costs in these proceedings, and also in the various proceedings underway in Estonia” does not even get close to providing the full and frank disclosure that is required in circumstances such as this.
18.2 Secondly, Daxin Baltic has failed to provide any sufficient evidence to establish that it has no realistic prospect of obtaining funds from any outside source.
18.3 The accounts contained within Daxin Baltic’s Annual Report show that, as at 31 December 2014:

18.3.1 Daxin Baltic’s current liabilities (€7,278,718) exceeded its current assets (€6,912,432);

18.3.2 Daxin Baltic’s total liabilities (€7,340,530) exceeded its total assets (€7,129,893);

18.3.3 Daxin Baltic had, in effect, become financially dependent on the Daxin Group, receiving over €3.7m in short-term intra-group loans.

18.4 Despite this net deficiency of current and total assets, Daxin Baltic has nevertheless found the money to prosecute both its defence and counterclaim in the present action, and its litigation in Estonia against Ms Kozlovskaja and others.
18.5 Mr Weller does not explain the source of these funds. The natural inference, in the absence of any satisfactory explanation, is that those funds have been provided by those, whether creditors or shareholders, who stand to benefit from the present litigation.
18.6 The suggestion that Daxin Petroleum’s ability to assist Daxin Baltic with this litigation has been impaired as a result of the “huge losses” resulting from the fraud is undermined by Daxin Petroleum’s own most recent accounts, filed on 19 July 2016. These show total current assets of approximately USD 296m, retained earnings of about USD 62 million and share capital of USD 20 million.
18.7 Daxin Petroleum therefore could, if it chose, provide the necessary funds. As to whether it would be likely to do so, the Defence and Counterclaim reveals a very close relationship between Daxin Petroleum and Daxin Baltic. Daxin Baltic was not formed as a trading company in its own right. According to paragraph 8 of the Defence and Counterclaim, its purpose was to provide services to Daxin Petroleum. Moreover, paragraph 12 of the Defence and Counterclaim asserts that Daxin Baltic needed the permission of Daxin Petroleum to have its own credit lines so as to be able to trade on its own account. Indeed, it is an essential part of Daxin Baltic’s conspiracy claim that it needed (but did not have) Daxin Petroleum’s authority to carry out the trades in question, even though Daxin Baltic was carrying out those trades on its own account and claims damages by reference to its own position (and not that of Daxin Petroleum).
18.8 Against that background, Mr Weller does not provide any satisfactory explanation of why the Daxin Group (and in particular, Daxin Petroleum) will not support Daxin Baltic. His suggestion of “a potential claim by Daxin Petroleum against Daxin Baltic”, and his statement that “Daxin Baltic currently has no expectation” of receiving funds from the Daxin Group, do not provide the Court with the necessary information. He does not even suggest that Daxin Baltic has asked for support, much less exhibit any relevant correspondence or other documentation.
  1. In the circumstances, I am unable to conclude that the making of a reasonable order for security would in fact prevent Daxin Baltic from prosecuting its counterclaim.

RELATED POSTS

THE PROVING THINGS SERIES

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: