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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Dunn Motor Traction Ltd v National Express Ltd [2017] EWHC 228 (Comm) (15 February 2017) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2017/228.html Cite as: [2017] EWHC 228 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Rolls Building, 7 Rolls Buildings Fetter Lane, London EC4A 1NL
		15/02/2017

Mr. Justice Teare :

1. This is an application by the Defendant against the Claimant for security for its costs. The underlying dispute concerns the premature ending, in June 2015, of a contract between the Claimant, Dunn Motor Traction Limited and the Defendant, National Express Limited, for the provision by the Claimant of coach services on certain routes in return for monthly payments from the Defendant. The Claimant says that the Defendant wrongly repudiated the contract and the Defendant says it was entitled to terminate the contract pursuant to its terms. The Claimant claims damages of some £20m. in lost profits.
2. In order to succeed on its application for security for costs the Defendant must show (i) that there is reason to believe that the Claimant will be unable to pay the Defendant's costs if ordered to do so and (ii) having regard to all the circumstances of the case it is just to make an order for security of costs; see CPR 25.13.
3. The claim is set down for trial for 12 days from 22 January 2018. Judgment is likely to be given in late February or early March 2018 though of course it could be later. The Defendant's costs are estimated to be in the sum of about £1.8m. Security is sought in the sum of £975,000 as to which figure there is no dispute. If the Defendant succeeds in its defence it is likely to recover its costs and the court is likely to make an order for an interim payment on account of those costs. The Defendant's costs will no doubt be subjected to a detailed assessment but the quantum of an interim payment is likely to be of the order of £750,000 to £1m. Such sum would be payable within 14 – 28 days of the day when judgment is handed down. So the question which must first be considered, the "threshold question", is whether there is reason to believe that the Claimant will be unable to pay a sum of that order in about April 2018.
4. The termination of the contract between the parties had a dramatic effect on the financial health of the Claimant. Thus in 2015 the turnover of the Claimant was in excess of £16m. but in 2016 the turnover was in excess of £8m. The net profit in 2015 was £593,000 but in 2016 there was a net loss of £1.1m. There is evidence from Mr. Ward, the managing director of the Claimant, that considerable efforts have been made to cut costs and to find alternative work for the Claimant's coaches. Notwithstanding those efforts he has estimated that by February 2018 the bank balance of the Claimant's will be £116,000. It was therefore realistically conceded by Mr. Penny QC on behalf of the Claimant that, subject to the point I will mention below, there is reason to believe that as at April 2018 the Claimant will not be able to pay the interim payment on account of costs likely to be ordered in April 2018.
5. Before dealing with the principal point relied upon by Mr. Penny to resist the application brought against the Claimant for security for costs I should mention a further argument which was developed in the evidence and in Mr. Penny's Skeleton Argument. The evidence of Mr. Ward, the Claimant's managing director, was that by February 2019 the Claimant's bank balance would be £1.125m. Mr. Penny submitted in his Skeleton Argument that the relevant time for assessing the Claimant's ability to pay costs was April 2019 because that is the date by which the detailed assessment of the Defendant's costs is likely to be completed. On that basis, and having regard to the evidence of the Claimant's managing director, the Claimant would be able to pay about £1m. in costs. This argument did not, in my judgment, assist the Claimant. A substantial sum by way of an order for an interim payment on account of assets is likely to be made in April 2018 and accordingly April 2019 is not the relevant date. Further, whilst I do not doubt the good faith of Mr. Ward in putting forward his financial estimates the court is not able to regard them as reliable estimates for the purposes of assessing the Claimant's ability to pay costs in April 2019, for these reasons. First, there is no material disclosed by Mr. Ward to support the estimates or explain how they have been reached. Second, the estimates (which run through to February 2021) show net profit increasing from £473,000 in February 2017 to £2,181,000 in February 2021. This is a remarkable transformation for a company whose business has been, on the Claimant's case in the action, so seriously damaged by the Defendant's (alleged) breach of contract that damages of £20m. have been claimed. Third, the estimate of £1.125m. being in the bank in February 2019 assumes that such sum would not have been spent on other matters. This assumption is unsafe in circumstances where, as Mr. Ward has stated, "we try to minimise the amount of cash we hold …….the money that comes into the business is used as working capital". Fourth, the estimate of £1.125m. does not appear to make allowance for the fact that the Claimant will have to pay its own legal costs of this action which have been estimated at £1.2m. though some (about £400,000) has already been paid (in part by means of an insurance policy). Mr. Penny said on instructions that the Claimant's legal costs have been paid in part by support from sister companies and that it is anticipated that such support will continue. This hardly supports the contention that the Claimant will be able to pay the Defendant's costs.
6. I can now deal with Mr. Penny's main point. It is that the sole shareholder of the Claimant, Mr. Dunn, has, on 30 January 2017, irrevocably undertaken to indemnify the Claimant in respect of its costs liability to the Defendant. Mr. Penny submits, by reference to cases dealing with the relevance of After The Event ("ATE") insurance to applications for security for costs, that in deciding whether there is reason to believe that the Claimant will be unable to pay the costs of the Defendant it is appropriate to take into account the availability of ATE insurance. In Premier Motorauctions v PWC [2016] EWHC 2610 (Ch) Snowden J. said, at paragraph 70, that where there is an ATE policy in place, the question is simply whether there is reason to believe that the insurer will not pay under the policy when called upon to do so. Mr. Penny submitted that that is the appropriate question to ask in relation to Mr. Scott Dunn's indemnity and the answer is that there is no reason to believe that he will not honour his indemnity.
7. Snowden J. reviewed the previous case law at paragraphs 20-28 of his judgment. It is apparent from that review that the decision of Stuart-Smith J. in Geophysical Service Centre v Dowell Schlumberger [2013] EWHC 147 (TCC), 147 Con LR 146. marks a turning point in the court's treatment of ATE policies in the context of applications for security for costs. Thus at paragraph 15 Stuart-Smith J. said

"It is also to be recognised in my judgment that the funding of litigation by ATE policies is, and has for some years now, been a central feature of the ability of parties to gain access to justice. In the absence of evidence to the contrary, the court's starting position should be that a properly drafted ATE policy provided by a substantial and reputable insurer is a reliable source of litigation funding. "

8. At paragraph 20 Stuart-Smith J. said:

"Ultimately, on an application such as this, the question is not whether the assurance provided by an ATE policy is better security than cash or its equivalent, but whether there is reason to believe that the claimant will be unable to pay the defendant's costs despite the existence of the ATE policy. It must now be recognised, in my judgment, that depending upon the terms of the policy in question, an ATE policy may suffice so that the court is not satisfied that there is reason to believe that the claimant will be unable to pay the defendant's costs. "

9. Snowden J. concluded that the approach of Stuart-Smith J. was correct. He reasoned (at paragraph 40) that the contractual rights given by an ATE policy were the property of a company like any other asset and therefore should be taken into account when deciding whether the threshold condition is satisfied.
10. For the purposes of this argument Mr. Pillow QC was content to accept that the approach of Stuart-Smith J. and Snowden J. with regard to ATE policies was correct (though he reserved the right to submit in the Court of Appeal that it was not). He submitted that that approach did not apply to an indemnity given by the sole shareholder of a claimant company to that company. I accept that submission.
11. The starting point of the approach with regard to ATE policies is that ATE polices are a "reliable source of litigation funding." It is that characteristic which enabled Stuart-Smith J. and Snowden J. to say that on application for security for costs where there was an ATE policy the question was whether there was reason to believe that the ATE insurer will not pay when called upon to do so. I do not consider that it can be said that an indemnity by the owner of a company to the company is a "reliable source of litigation funding."
12. The counterparty to an ATE policy is a "responsible and reputable insurer". By contrast the sole shareholder of a claimant company is, in a practical sense (though not of course in the strict legal sense), the adversary of the party seeking security for its costs. In Longstaff International v Baker & Mckenzie [2004] 1 WLR 2917 where a claimant's subsidiary had offered an undertaking to meet any order for costs made against the claimant Park J considered that the undertaking was not acceptable. The directors of the subsidiary were hostile to the claimant and, Park J. noted, "will probably be more so if Longstaff has just lost a contested case between itself and Baker & McKenzie". So here Mr. Dunn who is hostile to the Defendant because his company is suing it for £20m. might well be more hostile to the Defendant if he has just lost his claim and been ordered to pay costs to the Defendant. I do not say that he has no intention of honouring the legal obligation which he has voluntarily assumed to the Claimant (there was no evidence that he lacked such an intention) but the Defendant must have a legitimate fear that Mr. Dunn might procure the Claimant not to call upon the indemnity or might seek to resist enforcement of the indemnity. Mr. Penny submitted that Mr. Dunn could have no reason to act in such a manner but whether that is so or not the difference between a "responsible and reputable insurer" and the sole shareholder of a claimant company is such as to render inapt the analogy between an ATE policy and an indemnity given by the sole shareholder.
13. There is a further difference. Whereas ATE policies are now "a central feature of the ability of parties to gain access to justice" indemnities provided to a company by its owner in respect of the company's liability to pay legal costs are not so regarded. As Snowden J. said (at paragraph 43) "there is a public interest in permitting ATE insurance on appropriate terms to provide access to justice for insolvent companies under the control of responsible insolvency office-holders." There is no such public interest in permitting a sole shareholder to indemnify the company in order to provide access to justice to an insolvent company.
14. In my judgment the question which must be asked on an application for security for costs against a company, assuming that there is no ATE policy, is whether there is reason to believe that the company will be unable to pay the costs of the Defendant if ordered to do so. I accept that an indemnity provided by the sole shareholder of the company is an asset of the Claimant and must therefore be taken into account when assessing whether there is reason to believe that the Claimant will be unable to pay the costs of the Defendant. But where the answer to that question would otherwise be in the affirmative such an asset will not, save perhaps in an exceptional case, cause the answer to be in the negative. That is because a sole shareholder cannot, for the reasons I have given, be regarded as a reliable source of litigation funding.
15. The present case is not exceptional. Mr. Dunn is a business man. He has given evidence that the profits of his companies are ploughed back into his businesses and are used to further his plans for growth. This reflects the evidence of Mr. Ward, the managing director of the Claimant, that money that comes into the business is used as working capital. Mr. Dunn has undertaken no obligation to the Defendant. If in March/April 2018 the Claimant is ordered to pay costs to the Defendant Mr. Dunn might consider that the liquid assets of his companies could, at least temporarily, be put to what he might regard as a more profitable use than paying the costs of the Defendant. It is therefore not fanciful to suggest that he might procure that the Claimant does not call upon him to honour his indemnity. By so doing he would break no contractual duty owed to the Defendant, because there is none. Mr. Penny's answer to this was to say that the Defendant, as one of the steps in enforcing its judgment for costs, could obtain the appointment of a receiver with the power to make the demand of Mr. Dunn under the indemnity. It was suggested that this might cost £50,000. It might also take time. The important point however is that the demands of business might persuade Mr. Dunn to ensure that the Claimant does not call upon him to honour his indemnity in April 2018 but only does so, at the behest of a receiver, at some later date and after the expenditure of more legal costs.
16. If he is called upon to pay is there reason to believe that he will not pay ? For the same reasons that he might wish to procure that the Claimant does not call upon the indemnity it is not fanciful to suggest that he may prefer not to honour the indemnity but instead to invest liquid resources in his business. Mr. Penny asked rhetorically why would he not pay in circumstances where refusal to pay would lead to judgment being entered against him and the judgment being executed on his assets. In England his assets are his shares in the Claimant and another company, Motorcoach. It was submitted that he would not wish to put his businesses at risk by refusing to pay. Mr. Penny said "in a nutshell there was no obvious commercial reason why he would not wish to fulfil his obligation." But Mr. Scott may prefer to let the Defendant wait for its costs so that he can take advantage of a business opportunity and avoid the loss of his assets by execution by paying the costs before any irrevocable loss is enforced upon him. That realistic possibility would mean that there is reason to believe that the Claimant will not pay the Defendant's costs because the authorities show that the relevant time for payment is the time when the costs fall due for payment; see In re Unisoft Group (No.2) [1993] BCLC 532 at p.543 and Longstaff International v Baker & McKenzie [2004] EWHC 1852 (Ch) at paragraph 17. Quite apart from attractive business opportunities persuading him to delay payment delay might also be caused by the steps he envisages taking in order to pay the costs, namely, disposing of vehicles to raise £350,000, re-arranging banking facilities in the UK to generate £200,000 and arranging to borrow funds in Australia by the re-mortgaging of real estate owned by a related company. Mr. Dunn says that his own personal funds and his home in Australia (on which he says he has equity of £960,000) will be available to cover any shortfall. Clearly these steps might well cause delay such that the Claimant would be unable to pay the Defendant's costs when they fall due for payment in April 2018.
17. The threshold condition is therefore satisfied. The remaining question is whether it is just to order that security for the Defendant's costs be provided. It is usually just to order security when the threshold condition is satisfied; see Holyoake and another v Candy and others [2016] 6 Costs LR 1157 paragraph 67. Mr. Penny submitted that it would not be just to order security because of "the indemnity and the likelihood of payment." I am not persuaded that the likelihood of payment by Mr. Dunn is such that it would be unjust to order security. Mr. Penny next relied on the fact that the termination of the contract by the Defendant caused a severe downturn to the Claimant's business. It appears to have done so but if the termination was lawful it is difficult to see why that circumstance makes it unjust to order security. The court cannot on an application of this nature investigate the likelihood of the defence succeeding. Finally, Mr. Penny relied upon the fact that an order for security would have an effect on the business of the Claimant (because vehicles would have to be sold) and on expansion plans of Mr. Dunn's businesses in Australia and New Zealand. There is a risk of that but I do not consider that such risk makes it unjust to order security.
18. I therefore consider that it is just to make an order for security in respect of the Defendant's costs.
19. A question arose as to whether the order should be staged by ordering half of £975,000 to be provided in 4 months and half by the end of November 2017. This was premised upon Mr. Dunn's evidence that it will take 4 months to raise the necessary funds. However, that circumstance would suggest that the full £975,000 should be provided in 4 months. Mr. Pillow accepted that there could be staging, not by reference to Mr Dunn's ability to raise the necessary funds but by reference to when the Defendant will incur its costs. Some £400,000 has already been incurred and the process of disclosure is due to take place on 3 March 2017. Thereafter witness statements and expert reports will be exchanged by 21 July 2017. He therefore suggested that half be provided by the end of February and the other half by the end of May.
20. I consider that it would be just to order that £487,500 be provided within 4 weeks and that the remaining £487,500 be provided within 4 months.