The Northampton Regional Livestock Centre Company Ltd v Cowling & Anor [2013] EWHC 1720 (QB)

Case No HQ12X03155[2013] EWHC 1720 (QB)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 19/06/2013
Before
MR JUSTICE STEWART
Between
The Northampton Regional Livestock Centre Company LtdClaimantMr Cowling1 st DefendantMr Lawrence2 nd Defendant
Mr Reeves (instructed by Geoffrey Leaver Solicitors) for ClaimantMr Walker (instructed by DFA Law LLP) for 1 st DefendantMr Lewis (instructed by Howes Percival Solicitors) for 2 nd DefendantHearing Hearing dates: 18 th June 2013
JudgmentMr Justice Stewart :
[1]This is an appeal by the Northampton Regional Livestock Centre Company Ltd (“the Claimant”) against an order of Deputy Master Eyre. The order was made after a hearing on 27th March 2013. The essential paragraphs are as follows:
“1. The Claimant must by no later than 24.04.13 give security for the First and Second Defendant’s costs of the action in the sum of £240,000 rateably apportioned between the Defendants costs in accordance with their costs estimates by payment into court the sum of £240,000 into the Court Funds Office (or otherwise to the satisfaction of the Master). 2. The action is stayed until security is given as directed. 3. Unless security is given as ordered: (a) The claim form is struck out and the action dismissed without further order and (b) On production by the First and/or Second Defendants of evidence of default there is to be judgment for the Defendants without further order for the costs of the action. 4. There is liberty to apply to the court before 10am 24th April 2013 as to the timing and form of security.”
[2]The order contains an attachment headed “Reasons for Ruling” with four bullet points which are as follows:• “ The Claimant’s main contention is that its action is unanswerable or virtually so• The action certainly looks as though it is more likely than not to succeed but the Claimant has not cared to seek summary judgment• The Claimant also contends that its impecuniosity is due to the conduct of the Defendants but the evidence is not clear in that respect• The Claimant contends to that an order for security would stifle litigation but on its own evidence has made literally no attempt to find out whether its 63 shareholders and 8 directors or any other interested party’s might be willing to provide security.”[3]The judgment given at the hearing date was as follows:
“1. The Claimant makes serious allegations against the Defendants, allegations that look as though they have a promising prospect of success. The Claimant relies also on the assertion that the Defendants conduct caused its present impecuniosity however the Claimant has made literally no attempt to find out from it shareholders or directors or possibly from any other interested parties whether they would be prepared to assist it in providing security. This disables it from saying that it is literally unable to give security. 2. For all those reasons and bearing in mind that the Claimants have at no time sought summary judgment security will be ordered.”
[4]The hearing took place before the Deputy Master and took half a day. The appeal hearing has taken slightly more than one day in terms of arguments alone. Most of that argument has been directed to the merits of the case. That is because, after hearing Counsel for the Claimant, I indicated to Counsel for the First Defendant and Counsel for the Second Defendant that that was the aspect upon which I wished to hear them.[5]The background to this claim is that the Claimant is the assignee of this claim from Northamptonshire Auctions plc (“the company”). The First Defendant was the chairman of and a substantial shareholder in the company. The company owned the Northamptonshire Cattle Auction site in Northampton. The First and Second Defendants were partners in MCL Property Consultants up to and including a period in 2005.[6]In 2002 the cattle market ceased trading as a result of the foot and mouth epidemic. In October 2004 MCL were instructed to sell the cattle auction site. The claim is put on broadly two bases: i) The site was sold in September 2005 to Earlplace Ltd (“Earlplace”). Earlplace were developers. The purchase price was £2.25 million. When Earlplace completed the purchase in May 2006 they entered into a back to back sale with another developer, Kilmartin, for £5 million. The Claimants say that the property market was strong and allege negligence against both Defendants in marketing the property by reference to its existing use as an auction (without reference to its development potential), refusing anything other than entirely unconditional offers (i.e. excluding mixed offers of cash and profit shares) and in selling the property at a gross undervalue. ii) A claim primarily based on secret profits/breach of fiduciary duties. The Second Defendant was instructed by Earlplace to act on its behalf at some stage prior to the purchase by Earlplace in September 2005. The Second Defendant refused to disclose whatever reward he had received until ordered to do so in October 2012. The claim is for an account of profit and also a tracing claim into the Second Defendant’s assets. When the Second Defendant disclosed in October 2012 that he had received a payment of £744,035 from Earlplace, he also disclosed that this was calculated as 30% of the net profit of Earlplace over and above the price it had paid to the company and by virtue of its sale on to Kilmartin.[7]In terms of litigation the claim form was issued on 23rd September 2011. The defence of the First and Second Defendant was served on 29th March 2012. The Claimant rejected a request for security telling the Defendants that they had after the event insurance for the Defendants’ costs. After further procedural steps the first case management conference took place on 30 July 2012. There was a second case management conference on 9th October 2012 when directions were given by Master Eastman, including a trial timetable which fixed a trial window of 24th June – 26th July 2013. It was this order in which (by consent) the Second Defendant was ordered to disclose details of his retainer with Earlplace. These were then disclosed on 16th October 2012. On 19th November 2012 the Claimant’s application for a preservation order came before Mr Justice Eady. This was adjourned. On 19th December 2012 the interim preservation order made by Mr Justice Eady was continued, allowing payment of the Second Defendant’s legal fees and other costs from the protected funds.[8]The application for security for costs was issued in November 2012. This, it is said, was as a result of the Claimant disclosing in the preservation application that they did not have funds to give a cross undertaking in damages. It is accepted by the Claimant that it was because of court listing that the matter did not then come on until March 2013.[9]After the decision by Deputy Master Eyre an appellant’s notice was filed on 15th April 2013. On 17th April 2013 Hickinbottom J listed the application for permission to appeal for an oral hearing. He also ordered that the order of 27th March 2013 be stayed pending determination of the appeal or further order. Finally, on 3rd May 2013 Mrs Justice Thirwall granted permission to appeal and listed the appeal with a time estimate of half a day.[10]Unfortunately that time estimate, even with substantial pre-reading on my part, has proved woefully inadequate. Because of the exigencies of time I have kept this judgment as short as possible so as to be able to deliver it on the second day and so leave sufficient time for further consequential applications.[11]There are eight grounds for appeal. I will not reproduce all of them in full. However I must set out Ground 1. This reads as follows:
“Substantive merits a) His finding that the action “certainly looks as though it is more likely than not to succeed” was tantamount to a finding that the Claimant had demonstrated that the claim is highly likely to succeed and/or that it has a very substantial and high probability of succeeding against the Defendants. He should have dismissed the application for this reason alone. Further or alternatively he failed to recognise that this weighed very heavily, if not conclusively, in favour of dismissing the application, even on the assumption that there was reason to believe that the Claimant would be unable to satisfy a costs order in the Defendants favour or the Master failed to give proper weight to that fact (Fern Hill v KierConstruction 2000 CPREP 69) (Al – Koronky v Time Life 2006 EWCA Civ 1123 at para 24). b) Alternatively he failed when addressing the merits to consider and/or reach a conclusion on whether (as submitted by the Claimant) the merits satisfy the test of “highly likely to succeed” or “very substantial and high probability of succeeding”
. In doing so he failed to take account of a highly relevant, if not conclusive, factor.”[12]It is clear from the case Keary Developments Ltd v Tarmac Construction Ltdand another 1995 3 All England Reports 534 at 540 D – E that “In considering all the circumstances the court will have regard to the Plaintiff company’s prospects of success. Thus it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure.” In Al – Koronky v Time Life 2006 EWCA Civ 1123 (paragraph 24) it was said “A Claimant resident abroad whose case, at the moment of the interlocutory decision, appears highly likely to succeed at trial will not be required to lodge security for the Defendant’s costs.” Mr Reeve’s (for the Claimant) first submission is that the Deputy Master accepted that the Claimant’s case was “highly likely to succeed.” He also, during submissions, contended that the words used by the Master “more likely than not to succeed” were tantamount to the same thing. I do not agree. The Deputy Master’s finding was exactly what it states. It fell well short of the threshold test of “highly likely to succeed”.[13]The Claimant’s alternative submission in Mr Reeve’s Skeleton Argument dated 11 June 2013 is that if (which I have found) the Deputy Master did not decide that the claim was highly likely to succeed then he should have so found. The Defendants object to this point being raised for reasons which I shall briefly deal with below. Nevertheless I did hear reasonably extensive submissions upon it and I will encapsulate them as briefly as I can.[14]The defence to what I shall call the “secret profit” claim is that the Second Defendant ceased to be a partner in MCL on 4th July 2005. It is said that this is a complete defence to the claim. After this, so the Second Defendant says, Earlplace expressed an interest in purchasing the site. The First Defendant conducted all the negotiations with Earlplace on behalf of the company and the sale price of £2.25 million was more than the Farmers Consortium had offered (£1.8 million) and more than (what is said to be) an independent valuation report valuing the site at £1.5 million.[15]The Claimant alleges that correspondence between the alleged date of resignation (4th July 2005) and agreement to sell to Earlplace (23rd September 2005) explodes the defence that the Second Defendant was no longer a partner in MCL. I was taken through substantial correspondence with various parties in which the Second Defendant (for example) uses MCL’s email address and still refers to the company as “my client” I will not rehearse that correspondence here but I have taken full note of it. In addition it is said that the deed of dissolution of MCL dated 13th September 2005 describes MCL as a “going concern” and provides “said partnership shall be dissolved on a date to be agreed or as recommended by the firm’s accountants Hawsons”. I made a note (which I read aloud) during the First Defendant’s submission to this effect:
“The Claimant accepts that for the high degree of probability threshold – for the purposes of this application – it must be demonstrated that the Second Defendant had not resigned in reality as at 3rd July 2005 but continued in effect as agent up to and including September.”
This was subject to the section 38 Partnership Act 1890 point which I shall refer to in the next paragraph. One of the points made by the Claimant is that there is no witness evidence from the First or Second Defendant explaining the Second Defendant’s activities in the period July to September 2005. This is correct. However witness statements for trial have not been exchanged. The only witness statements are for the purposes of this application and the applications before Mr Justice Eady. The evidence from the Claimant in response to the Defendants’ November 2012 applications was not filed until March 2013. It is a statement from Mr Harris dated 4th March 2013 which touched on the merits. Without expressly stating that the Claimant was intending to submit that there was a high probability of success Mr Harris (paragraph 9) did deal with the July – September correspondence. In a letter from the Claimant’s Solicitors to the Second Defendant’s Solicitors dated 13th March 2013 the Claimants told the Second Defendants “for the avoidance of doubt our clients will contend at the hearing on 27th March that your clients failure to give proper disclosure or comply with the order of Eady J are relevant to the merits and as of course the merits are relevant to the issue of security, it follows that your client’s deficiencies in his disclosure and breaches are relevant to the question of whether security should be ordered.” I note that whilst I have so far concentrated on the high degree of probability point, which, if established, may be fatal to an application of security for costs, the merits of the Claimant’s claim can also be relevant in other contexts in the general discretion which a court has in such application. So, without going into detail of the merits, the court may well decide whether the Claimant’s claim is bona fide or has reasonably good prospects of success or whether it is a meritorious claim which should not be stifled if the application for security is being used oppressively. It is right to say that the Claimant’s had not spelt out to the Second Defendants prior to the hearing before Deputy Master Eyre that they wished to rely on the merits argument for all purposes prior to Mr Reeve’s Skeleton which was served shortly prior to the hearing before the Master.[16]A little more context from the Defendants should be set out. They make these points:(1) It is accepted that the relevant correspondence July – September 05 will be important at trial and the Claimant may establish on the basis of it that the Second Defendant did not in reality resign as at 3rd July 2005. Nevertheless it is said that this is the very stuff of one of the main issues at trial and cannot be adjudged on the papers, especially given the way the matter has been raised in this application.(2) It is not the Claimant’s case that they have a high probability of success in any allegation that the Second Defendant resigned so as to save for himself something that could have gone to the company.(3) The First Defendant knew that the Second Defendant was engaged by Earlplace prior to the deal with Earlplace. This is important because the First Defendant was also chairman and a substantial shareholder in the company. Nevertheless the First Defendant did not know the terms of engagement or eventual financial reward received by the Second Defendant from Earlplace.(4) The evidence from the Second Defendant (paragraph 58) is such that he was to have a full time role with Earlplace and Earlplace expected him to do 90% of the ground work which would assist them to enable development of the site. Earlplace were trying to keep all up front expenditure to a minimum particularly in this case given the highly speculative nature of the purchase. In other words the Second Defendant was being paid for future work. Earlplace did not want to pay him on a fixed fee or time basis. Neither the Second Defendant nor Earlplace had any idea what 30% would equate to because they did not know what the future of the project would be. (This is also in evidence in a letter from Mr Malby of Earlplace). Indeed there was a great deal of good fortune because the sale to Kilmartin for a very high price of £5 million was such that (perhaps as a consequence) Kilmartin subsequently became insolvent.[17]If I make my own decision on the strength and weakness of the Claimant’s case as to whether the Second Defendant had in reality resigned as partner as at 3rd July 2005 or rather had continued in effect as agent up to and including the time of the sale to Earlplace, I would not disagree with Master’s assessment that “the action certainly looks as though it is more likely than not to succeed.” However I would not say that there was a high degree of probability of success.[18]In the alternative the claimant says that section 38 of the Partnership Act 1890 covers the situations. Section 38 provides:
“After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continues notwithstanding the dissolution so far as maybe necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise.”
The Claimant says that both Defendants continue to owe the obligations of the partner in respect of the ongoing contracts to act as agent in the sale of the company’s property; in the alternative they say that the Second Defendant would have had not defence merely because of his resignation because duties continue after determination of the agency relationship. The Defendants submit that section 38 has no application. In Boghani v Nathoo [2011] EWHC 2010 1 (Ch) the Chancellor said at paragraph 27 “In my view the terms of section 38 are explained in the authorities to which I have referred, in particular Inland Revenue v Graham’s Trustees demonstrate the following propositions :
“… (4) Even in relation to transactions, not being new bargains or contracts begun but unfinished at the time of dissolution section 38 applies only if and to the extent that the completion of such transactions is necessary to wind up the affairs of the partnership.”
I do not accept that the Claimants have a high degree of probability of success and that section 38 is a complete answer to the Defendants’ case. This will have to be explored in detail at trial. Similarly as regards the question as to whether the Second Defendant was under a duty to the company at the material time, this will require a detailed examination of the facts. This much is apparent from the speech of Lord Upjohn in Boardman v Phipps 1967 2Ac 46 at page 127. “… (4) Even in relation to transactions, not being new bargains or contracts begun but unfinished at the time of dissolution section 38 applies only if and to the extent that the completion of such transactions is necessary to wind up the affairs of the partnership.”[19]Overall my own assessment in this case is not different from that of the Master as I have recorded above. There was further argument as to whether that was a maturing opportunity. The Defendants say that there was none available to the company since the First Defendant tried to obtain a profit share agreement between the company and Earlplace but Earlplace rejected this. The Claimant says that is irrelevant in law. This point does not affect my assessment since the precise facts need to be established before anything approaching a definitive decision can be reached.[20]I should note here that the Second Defendant objected to the Claimant arguing that Deputy Master Eyre should have found that the claim had a high probability of success. The Second Defendant submits: 1. That the grounds of appeal do not cover this point. 2. That this is not merely a technical issue and that it affects how the Defendants have prepared for the appeal; had there been a clear ground of appeal on this point then a transcript of the hearing before the Master would have been required. 3. In any event because the appeal court is reviewing a discretion the question is as to whether the Master was plainly wrong in the exercise of that discretion. Counsel for the Second Defendant accepted it may well be that, having heard all the arguments, I would, if I was dealing with the matter afresh, have come to the same conclusion as the Deputy Master, in which case the technical points are irrelevant. I have done so and therefore they are. I say no more about them.[21]The second ground of appeal is that the Deputy Master took account of an irrelevant fact that namely whether the Claimant had applied for summary judgment. I do not see any error in the Deputy Master’s reasons on this basis. I regard his comment merely as a reflection upon the fact that this accords to some extent with his own assessment (and mine) that he could not state more than that the action looked as though it was more likely than not to succeed.[22]I have dealt first and foremost with the high degree of probability of success argument since, on the authorities, it would be unusual for security to be ordered if the Claimant’s prospect of success were highly probable. I shall, although a little late in this judgment, now set out the relevant rule of the Civil Procedure Rules:
“25.13 – (1) The court may make an order for security of costs under rule 25.12 if – (a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and (b) (1) One or more of the conditions in paragraph (2) applies or (2) an enactment permits the court to require security for costs”
There is no argument but that 25.13(1)(b) is applicable here. Therefore the matter cited by the Deputy Master became one of discretion. I have already found that he was not plainly wrong in his assessment of the merits of the Claimant’s case. The remaining question is as to whether he exercised his discretion with the “generous ambit within which a reasonable disagreement is possible (Tanfern Ltd v Cameron McDonald 2000 1WLR 1311 at para 2). (a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and (b) (1) One or more of the conditions in paragraph (2) applies or (2) an enactment permits the court to require security for costs”[23]Ground 3 of the grounds of appeal criticises the Deputy Master’s decision on the basis that “he decided wrongly that the evidence was unclear when there was clear and overwhelming evidence that in particular:(a) The Defendants conduct had deprived the company of £744,000.(b) The Defendants had concealed information which was vital to the liquidator’s decision not to pursue the claim using the assets of the company and to assign the claim and had blocked the use of the company’s assets.” A preliminary point here, which apparently had not been specifically considered before is that the Claimant’s want of means had not been brought about by any conduct on the part of the Defendants. It may be that the company’s want of means had been so brought about but the history is that the Claimant purchased the cause of action from the liquidator of the company for £2,026. The assets of the company, namely £285,114 were distributed to shareholders (41% to the First Defendant). Thus the potential beneficiaries of this action received the distribution of assets and now seek, via the Claimant, to litigate the action at no cost risk to themselves. It is in my judgment unsurprising that the Deputy Master was not able to say more than “The Claimant also contends that its impecuniosity is due to the conduct of the Defendants but the evidence is not clear in that respect.” He did not err in saying this.[24]Ground 4 alleges that the Deputy Master wrongfully appeared to conclude that the application for security of costs should not be granted unless the Claimant could put forward evidence showing it had approached the 62 shareholders (however small their interest) and the directors to demonstrate that security could not be provided. The law clearly states that an application for security should not be used oppressively such that for example a genuine claim should not be stifled. It is also clear that the Claimant’s claim is a genuine claim. Nevertheless before a court refuses to order security on the grounds that it would unfairly stifle a valid claim the court must be satisfied that in all the circumstances it is probable that the claim would be stifled – see the Keary Developments Ltd case. Volume I of the White Book 2013 at page 766 states “In considering this issue the court should consider not only whether the Claimant company can provide security out of its own resources to continue the litigation but also whether it can raise the amount needed from outside sources for example directors, shareholders or other backers or interested persons (including creditors…in all but the most unusual cases, the burden lies on the Claimant company to show that, apart from the question whether the company’s own means are sufficient to meet an order for security there will be no prospect of funds being available and forthcoming from any outside source (Kufaan Publishing Ltd v Al – Warrack Bookshop Ltd, March 1 2000 unreported appeal).”[25]It seems to me that the Master was entirely right to focus on the fact that the Claimant had made no attempt to provide proper evidence that there was a probability that it would be unable to pursue the action if the order was granted. Thus the allegation of stifling was not at all made out. Indeed the Claimant has subsequently made an application (which I will deal with after this judgment) in which the form and amount of security offered is as follows: ATE Insurance £200,000 Less disbursements £ 80,000 Net £120,000 Cleared cash £ 40,000 Guarantee from Solicitors £ 80,000 Further cheque £ 50,000 Total £290,000 This compares with the figure before the Master of £125,000 ATE Insurance less £80,000 Disbursements equals £45,000.[26]Ground 5 is that the Master failed to make a decision as to whether the ATE was sufficient standard security and that he should have decided that it was. The Claimant says that the Master failed entirely to deal with the ATE. I do not accept this ground of appeal. The Master had ordered security of £240,000. There was insufficient evidence before the Master that the Claimant would raise this. By paragraph 4 of his order he expressly gave liberty to apply to the court before 24th April 2013 as to the timing and form of security. This included the ability to provide security by ATE. It is therefore unsurprising that he failed to deal with the ATE point and left it open for further consideration if and when the amount of £240,000 could be raised in one form or another.[27]Ground 6 of the appeal; other factors which it is said the Master did not appear to take into account, namely(a) The delay in making the applications.(b) The public interest in the resolution for dispute.(c) The Defendants’ liability insurance.(d) The extent which the Claimant’s have permitted the Second Defendant to pay its own costs out of the fund claimed by the Claimant and/or the extent to which the Second Defendant claims to have dissipated that fund to the prejudice of the Claimant.[28]I find that there is nothing in these complaints. In summary and following the same lettering:(a) Although security for costs had been raised as a potential issue in early 2012 the application was not made until November 2012. However it was triggered (unsurprisingly) by the Claimant’s inability to enter into a cross-undertaking as to damages by reason of its impecuniosity. The Claimants accept that from November 2012 onwards any delay was not of the Defendants making.(b) There is no public interest in the resolution of this dispute.(c) As to the Defendants’ liability insurance I am told that there are question marks over this. In any event I am not persuaded that it is a material point.(d) This is a bad point. If the Second Defendant succeeds then, absent security, he will have dissipated his own fund in legal fees.[29]Grounds 7 and 8 suggest that the Deputy Master exercised his discretion wrongly and/or that his decision was plainly wrong. I disagree for the reasons I have already given. Indeed were I to exercise my discretion afresh then I would undoubtedly award security for costs in this case. It is noteworthy that the application for security was in the sum of £684,000. In his discretion the Master made an order of £240,000. There is no cross-appeal against this amount. There is no justifiable complaint that the Master wrongly awarded security and/or that he wrongly awarded security in the amount he did.[30]For these reasons the appeal is dismissed.