Mr Justice Coulson:
On the joint instructions of the parties, all the company names in this Judgment have been disguised for reasons of commercial confidentiality.
1. INTRODUCTION
- By an application dated 25th April 2012, the defendant, Falcon, seeks security for its costs, down to the end of the disclosure process, pursuant to CPR 25.12. Although the sum originally sought by way of security was £295,000, by the time the application was made the figure was put at £610,000, and by the time of today's hearing, it had increased again to £757,108.45. On any view, it is therefore a substantial application.
- In order to deal with it properly, it is necessary to set out some of the history of these proceedings generally, and this application in particular. I do that in Sections 2 and 3 below. I then address briefly the relevant principles of law and practice in Section 4, before analysing the extensive evidence as to impecuniosity provided by both parties in Section 5 below. I address the separate issues that arise on discretion in Section 6. Matters relevant to the amount and manner of security are addressed in Section 7.
2. THE PROCEEDINGS
- Eagle is a mobile virtual network operator in the prepaid mobile Sim card market. By a Claim Form issued in the TCC on 6 March 2012, Eagle seek specific performance and other relief, arising from alleged breaches by Falcon of an ongoing Wholesale telecommunications and supply Agreement dated 8 July 2009 (and two subsequent Agreements). Pursuant to the Wholesale Agreement, Falcon, which is the company resulting from the merger of Hawk and Owl, provides Eagle with access to its radio access network. Amongst other things, the pleaded complaints relate to the modifications made by Falcon to the data solution they provided under the Wholesale Agreement (which could not be made to work), and alleged discrimination against Eagle's customers by Falcon. There is also an issue about the proposed decommissioning of at least one Hawk site. The Particulars of Claim were served on 9 March 2012.
- On 11 May 2012, Falcon served a lengthy Defence. Amongst other things they contend that such changes that have been made (or are likely to be made) arise out of their broader network plans and are not breaches of the Wholesale Agreement at all. It is also said that any difficulties that Eagle may have faced in relation to the services supplied by Falcon, including the data solution difficulties, are of Eagle's own making.
- On 8 June 2012, Eagle served a Reply. The pleadings are therefore closed. The next stage is disclosure. Pursuant to the earlier order of Mr Justice Ramsey, made at the CMC on 4 April 2012, disclosure by list was due to be completed by this Friday 20 July 2012. However this has been extended by agreement between the parties to 10 August 2012.
- Other directions made by Mr Justice Ramsey on 4 April concerned witness statements (to be exchanged in October 2012); experts' joint statements (to be agreed by 2 November); and their subsequent reports (to be exchanged by 30 November). The trial was fixed for 11 February 2013 with an estimated length of 3 to 4 weeks. It appears that at the CMC there was not time for the court to consider making a Costs Management Order (one of the reforms suggested by the Jackson Costs Review and the subject of a pilot scheme overseen by the TCC in London), although detailed costs estimates were provided. Their relevance to the present application will become apparent below.
- It should also be noted that on 2 April 2012, Eagle issued an application for an interim injunction in respect of the proposed decommissioning. This sought, amongst other things, to require Falcon to ensure that replacement Hawk signal coverage was provided in the area where the legacy site was being decommissioned.
- The application for an interim injunction was to be heard, also by Mr Justice Ramsey, on 1 and 2 May 2012. However by a consent order dated 1 May 2012, the terms of which remain confidential, Eagle's application was withdrawn and the substantial costs caused thereby were agreed to be costs in the case.
- The application for an injunction is said to be one of the reasons why the costs incurred to date by Falcon are so much higher than they would otherwise have been. Falcon's costs to date are put in the sum of £534,456. On the figures, no more than £265,000 odd of that sum can be put down to the injunction application.
3. THE APPLICATION FOR SECURITY
- On 23 March 2012, Bird and Bird, Falcon's solicitors, wrote to Eagle outlining their concerns about Eagle's financial position. These concerns were based on Eagle's last available accounts, which were for the year ending 31 December 2010. Although Eagle's auditors had been prepared to say that these accounts could be prepared on a going concern basis, this was expressly on the understanding that its parent company "can and will continuing providing its financial support for at least 12 months." Another complication was that Eagle have two parent companies: Kite, which was itself co-owned by Osprey, and both had failed to file accounts for the year ending 31 December 2010. In the letter, security was sought for disclosure in the sum of £295,000.
- Eagle's response of 30 March 2012 enclosed the late accounts of Osprey and Eagle for the year ending 31 December 2010. No other substantive information was provided.
- On 3 April Bird and Bird sought the accounts of Kite for the same period (which were now overdue), and management accounts for all three companies for the period from 1 January 2011 onwards. This was so that they could obtain more up-to-date financial information. The audited accounts for Kite were provided on 5 April 2012, and management accounts for Eagle, together with consolidated management accounts for the holding companies Kite and Osprey, were provided on 16 April 2012. All three companies are owned and controlled by just one man, Mr Allirajah, who also owns and controls Buzzard, and one of its subsidiary companies, Harrier.
- Bird and Bird instructed a financial expert, Mr Michael Pilgrem, to review the available information as to Eagle's financial position and those of its parent companies, to give an opinion as to whether it could meet an order for costs made against it. His first report, dated 20 April 2012 concluded that:
a) Eagle were insolvent on a balance sheet basis, with net liabilities of £2.3 million in the audited accounts of 2010, and £1.449 million in the unaudited accounts of 2011.
b) Eagle might also have been insolvent (in the sense of being unable to pay its debts) as defined in section 123(1) of the Insolvency Act 1986.
c) It was very uncertain whether the Osprey Group had a positive future. Osprey had very few assets that it could realise quickly if it needed to provide financial support to Eagle.
d) Kite had a number of subsidiaries who were financially troubled, a concern when its biggest asset was the sum of £4.885 million due to it from those subsidiaries.
e) "There is some considerable uncertainty that Eagle would be able to honour, on a timely basis, an undertaking in damages if it was called upon to do so…Like Eagle and Osprey, Kite has little cash and I have seen no evidence that it has any cash that is surplus to its operational requirements".
- On the basis of this report, and further requests for information which were not substantively answered, Bird and Bird issued this application on 25 April 2012. As noted above, the sum sought by way of security was now £610,000, more than twice the sum sought in the original letter. The application was supported by the second statement of Mr Jonathan Speed, the solicitor handling the case on behalf of Falcon. Amongst other things, it disclosed and relied on Mr Pilgrem's report.
- The application for security was opposed. Eagle served an expert's financial report from Mr Andrew Maclay on 30 April 2012. This was a short report which accepted at paragraph 2.6 that Eagle was insolvent on the balance sheet test, but suggested that Eagle was trading profitably and was reducing the deficit in shareholders' funds. The report also took issue with Mr Pilgrem's negative views about Osprey, although it said nothing about Kite.
- Mr Pilgrem then served a second report dated 18 June 2012. This repeated the view that Eagle were insolvent, a view which (as he noted) Mr Maclay appeared to share. It restated his concerns about Osprey, noting at paragraph 3.23:
"I see no further evidence that should cause me to change my opinion on Osprey in my first report. I remain of the view that Osprey's future is uncertain and it has few assets that it could realise quickly if it needed to provide financial support for Eagle or any of its other subsidiaries as a result of these proceedings or otherwise."
- Mr Pilgrem's second report also dealt with the financial position of other companies owned by Mr Allirajah, including Harrier, a member of the Buzzard group of companies. About them he said this:
"2.15 I identify the interdependence of the Osprey and Buzzard Groups in my first report. By March 2011 the Buzzard Group's activities were primarily the provision of wholesale termination to the Osprey Group's MVNO businesses and acting as a service provider or distributer to the Osprey Group's MVNOs. Given the importance of the Buzzard group as Eagle's counterparty and understanding of the financial position, the former may be important in forming a view of the financial position of the latter. It appears to me that the past financial performance of Eagle depends and the future financial performance of Eagle will depend, in part, on the terms of business set between Eagle and Harrier. Ultimately those terms are under the common control of Mr Allirajah.
2.16 The evidence that I have seen summarised in the paragraphs below suggests that the Buzzard Group has severe financial difficulties. In my view, that reduces the likelihood that members of the Buzzard Group are in a position to put the interests of Eagle and other members of the Osprey Group before their own interests."
Mr Pilgrem then went on to explain how and why he was concerned about Buzzard. At paragraph 2.20 he warned:
"Buzzard's 2009 financial statements are accompanied by an independent auditor's report by Alliotts (the same firm that audits financial statements of the Osprey Group). Alliotts were unable to form an opinion as to whether Buzzard's 2009 financial statements gave a true and fair view of the state of affairs of the Buzzard Group, or Buzzard. This was because of the potential significance of the combined effect of matters relating to the applicability of the going concern basis and limitations in scope in respect of the audit of certain subsidiaries."
- Subsequently, Mr Maclay has also produced a second expert's report dated 29 June 2012. Amongst other things, this report:
a) Restated the view that Eagle were insolvent on the balance sheet test but, because of the profits now being generated, were not insolvent on the cash-flow test;
b) Stated that, whilst Eagle did not have sufficient cash balances to satisfy an order for costs, Mr Maclay could "see no reason why it would not be able to do this by calling in some of the money due to it from other group companies";
c) Stated that, despite the auditors' qualifications in the 2010 accounts, Osprey had net assets which could be used to provide funds to Eagle;
d) Stated that Kite had insufficient cash balances to pay the order for costs but "may be able to call in some of its debtors to pay Falcon if that was to be necessary".
- In addition, there was a statement from Mr Adam Sharples dated 2 July 2012, the Group Financial Controller of Osprey, who made a number of points about the inter-company dealings, although did not exhibit any documents. There was also a further statement from Mr Speed, dated 12 July 2012, which increased the sum sought by way of security to £783,634.08. That contained a mathematical error, and Mr Charlton has made clear that the sum claimed by way of security is now capped at £757,108.45. There was also a late statement from Mr Asanga Desappriya Sirisena, Eagle's Account Manager, served last Friday.
4. THE APPLICABLE PRINCIPLES
- CPR 25.12 gives the court the power to order security for costs against a claimant. CPR 25.13 indicates the circumstances in which such an order might be made. The relevant parts for that rule for present purposes are:
"(1) The court may make an order for security for 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)(i) one or more of the conditions in paragraph (2) applies…
(2) the conditions are…
(c) The claimant is a company or other body (whether it is incorporated inside or outside Great Britain), and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so…"
- Accordingly, the rule envisages a two stage test. First, in an application such as this based on impecuniosity, the applicant (Falcon) must show that there is reason to believe that the claimant (Eagle) will be unable to pay its costs if ordered to do so. Secondly, if that first stage is made out, the court must be satisfied, in the exercise of its discretion, that it is just in all the circumstances to make an order for security for costs.
- As to the first stage, the following should be noted:
a) The defendant must show that there is reason to believe that the claimant will not be able to pay; it does not need to demonstrate on the balance of probabilities that the claimant will not be able to satisfy any costs order: see Jirehouse v Beller [2009] 1 WLR 751. However, something more than mere doubt or concern about the future ability to pay is required: see Re Unisoft Group Limited [1993] BCLC 532.
b) The test is "will not be able to pay", not "might not be able to pay": see Texuna International Limited v Cairn Energy PLC [2004] EWHC 1102. That test is not "watered down" by the earlier words "reason to believe": see Unisoft.
- As to the second stage, it is very difficult (if not impossible), in a complex commercial dispute like this, for the court to form a view as to the respective merits of the claim and defence. An application for security for costs should not be sidetracked into an investigation into the merits of the case, unless it can be clearly demonstrated that there is a high degree of success or failure: see Fernhill Mining Limited v Kier Construction Limited [2000] CP 69. Certain matters, such as admissions or significant offers, may be taken into account in the court's consideration of the overall justice of making an order for security (see Jones v Environcom [2010] Lloyd's Rep 190), but the general position is that success or otherwise at trial is not a relevant factor: see Mastermailer Stationery v Sanderson [2011] LTL April 21 2011, a decision of Vos J.
- Other relevant considerations relate to the timing of the application and the manner in which security might be provided. If an application is unreasonably delayed, it may not be granted at all, as envisaged by Lord Denning MR in Sir Lindsey Parkinson v Triplan [1973] QB 609, or might be significantly reduced. In RBIL v Ryehurst [2011] EWHC 2209, the lateness of the application led to a reduction in the amount of security ordered of £500,000. As to the type of security, CPR 25.12(3) gives the court a wide discretion in relation to both the timing and manner in which security might be given.
5. THE RELEVANT EVIDENCE
5.1 EAGLE
- It is common ground that Eagle are insolvent on the balance sheet test. Their audited accounts show a loss of £4.2 million in the year ending December 2009 and a loss of £2.5 million in the year ending December 2010. The unaudited accounts for the year ending December 2011, show a deficit of about £1.5 million. Even the projections up to the end of this year show a deficit of just under £1 million.
- The last audited accounts for Eagle, filed late, contain two express warnings by the auditors. The first is in these terms:
"The company made a profit of £1,285,135 for the year and has net liabilities of £2,713,011. The financial statements have been prepared on a going concern basis on the grounds that the parent company can and will continue providing its financial support at least 12 months from the date of approval of these accounts. The group has also considered its financial projections and working capital requirements for the future period and considers that the funding will be adequate and available for the company to continue trading at current levels of activity. The director therefore believes that the adoption of the going concern basis is justified."
- The second warning is even more troubling:
"These conditions along with the other matters explained in note 1.1 to the financial statements [the note I have just read] indicate the existence of a material uncertainty which may cast a significant doubt about the ability of the company to continue as a going concern. The financial statements do not include the adjustments that would result if the company was unable to continue as a growing concern".
- In my view, by reference to the principles noted in paragraph 22 above, the balance sheet insolvency, together with those two warnings, are sufficient on their own for me to conclude that there is reason to believe that Eagle will be unable to pay any order for costs made against it. That conclusion seems to be confirmed by paragraph 12 of Mr Dennys' helpful skeleton argument, which says in terms that "Eagle itself does not have sufficient cash balances to make an immediate payment to Falcon in the sums claimed in respect of costs".
- Notwithstanding this, Mr Dennys maintained that it was unduly mechanistic to look simply at assets and liabilities and conclude that, if the latter outweighed the former, the first part of the test for security for costs was made out. In this regard, he relied on the judgment of Lord Neuberger MR in BNY Corporate Trustees Limited v Eurosail UK PLC [2011] EWCA Civ 227. There the dispute was under the Insolvency Act, and the issue was whether the simple balance sheet test justified the winding up of the defendant company. Lord Neuberger said that it did not. At paragraphs 44 and 47 of his judgment, he said:
"44…In practical terms it would be rather extraordinary if section 123(2) was satisfied every time a company's liabilities exceeded the value of its assets. Many companies which are solvent and successful and many companies early on in their lives would be deemed unable to pay their debts if this was the meaning of section 123(2)…47. More generally, I find it hard to discern any conceivable policy reason why a company should be at risk of being wound up simply because the aggregate value, however calculated, of its liabilities exceeds that of its assets. Many companies in that position are successful and creditworthy and cannot in any way be characterised as 'unable to pay their debts'. Such a mechanistic, even artificial reason for permitting a creditor to present a petition to wind up a company could, in my view, only be justified if the words of section 123(2) compel that conclusion and in my opinion they do not."
- In my judgment, there is a clear difference between an application under the Insolvency Act to wind up a company, where the detailed provisions of sections 123(1) and (2) of the Act come into play, and an application for security for costs under CPR 25.13(2)(c). The first stage of the security application requires a different (and plainly lesser) test than that required by the Insolvency Act. Under that first stage of the test, the applicant simply needs to show that there is reason to believe that the respondent will not be able to pay an order for costs. None of the complexities of Section 123(2) are applicable or even relevant.
- For this reason, I do not consider that the approach of both experts, which has involved a detailed consideration of the Insolvency Act and the drawing of fine distinctions between the so called 'balance sheet' test and the 'cash flow' test, is of any real help. However, if I am wrong about that, and if the so-called 'cash flow' test (namely whether or not from an accounting point of view Eagle can pay its debts as they fall due) is of relevance to an application for security, then I consider that, on balance, that test too has been made out. In reaching that conclusion I have had regard to the following matters:
a) The only audited accounts show significant losses and demonstrate that Eagle themselves could not pay their debts as they fall due. In that regard, it might be said that they are no different to most start-up businesses;
b) Eagle's auditors expressly qualify the 2010 accounts in two ways which cast doubt as to the reliability of their own figures, let alone the subsequent unaudited figures;
c) The unaudited information shows an improving picture but, precisely because it is unaudited, it must be regarded with caution. That is exacerbated by the circumstances in which the subsequent information has been provided, which is largely as a result of specific requests by Falcon and Mr Pilgrem;
d) The market in which Eagle operate is exceedingly competitive. Their margins are very small and the profits and loss from one quarter to the next are extremely volatile. Thus any projections for the future must be subject to considerable fluctuation;
e) The unaudited management accounts demonstrate that as much as £9.9 million is owed to Eagle by other companies owned by Mr Allirajah, in a complex series of debts, deferred payments, management charges and unspecified services. The evidence relating to the inter-company transactions is unverified, unclear and the subject of debate between the experts. Not all the points raised by the experts can be resolved on this application. What is, however, plain is that not one of these numerous companies is said to have any significant cash in the bank, or readily realisable assets. In my view, such a large debt, in such opaque circumstances, is a further factor that weighs against Eagle in this application and makes it more likely than not that they could not pay their debts as they fell due.
- Accordingly, for all those reasons, I find that, whichever accountancy approach is adopted, there is reason to believe that Eagle will be unable to pay any costs order made in favour of the defendant. Thus the first part of the test at CPR 25.13(2)(c) has been made out.
- On one view, it is unnecessary for me to go on and consider whether the first part of that test has been made out in relation to the other companies owned and controlled by Mr Allirajah. What matters is the financial position of Eagle, not the companies with whom they are in a complex inter-company relationship. But since I have reached a firm view on those issues, and because those views are likely to be relevant to some of the other matters which I have to decide, not least the issue of whether a parent company guarantee would provide adequate security, I set out my brief conclusions below.
5.2 KITE
- The audited accounts for Kite are the subject of a number of queries and concerns in Mr Pilgrem's first report. In essence, he doubts their reliability. Four of Kite's six subsidiary companies have deficits in their capital and reserves and a fifth is loss-making. Despite this, Kite are said to have assets of at least £4.9 million, although careful analysis demonstrates that this is actually a debt due to Kite from those same subsidiary companies. Indeed, almost its entire turnover is represented by management charges in connection with those subsidiary companies.
- Accordingly, although Kite are balance sheet solvent, that is only because of debts from group undertakings which are themselves in deficit. That could not give the court or Falcon the confidence to conclude that Kite could, if required, meet a costs order on behalf of Eagle.
5.3 OSPREY
- Osprey are in a worse position than Kite. Their assets are less and they have no cash reserves. Worse still, in March 2012, when their accounts for the year ending 2010 were provided late, their auditors were unable to form an opinion as to whether Osprey's 2010 financial statements gave a true or fair view of the state of affairs of the Osprey Group or Osprey themselves. In explaining their disclaimer, the auditors referred specifically to the application of the 'going concern' basis and the assumptions that had been made by Mr Allirajah in that regard.
- In addition, the auditors also noted that no audit had been performed or subsidiary undertakings of Kite that had been put into administration or were in jurisdictions where there was no legal requirement for an audit. Those concerns, arising two years after the relevant period covered by the accounts, obviously trigger a number of alarm bells. They are also consistent with the worrying financial picture painted by these various accounts.
- The management accounts of Osprey do show that in some annual quarters, they can make a significant profit. But the pattern is very volatile. Thus, a large profit made in the last quarter of 2011 is to be contrasted with a very small profit made in the first quarter of 2012. That seems to me to highlight the danger of placing too much reliance on unaudited 'snapshots'. The principal assets of Osprey are again represented by other debtors, amounting to £6.7 million. Very little information is provided as to who those debtors are or what those debts represent.
5.4 THE BUZZARD GROUP
- The management accounts and the more recent information show that 79% of Eagle's turnover in 2010 (and thus their increasing profitability) arose from sales to Harrier. Thus, Eagle's future performance would seem to depend upon the terms of business between Eagle and the Buzzard Group, a point expressly made by Mr Pilgrem. However, those terms of business have not been provided to him or to the court, despite a number of requests.
- It seems to me that this gives rise to two problems. One is that information about a possibly critical tool in assessing Eagle's future profitability appears to have been deliberately kept back. The other is that, as even Mr Maclay is obliged to concede, reliance on that one trading relationship "could be indicative of uncertainty in trading going forward, if such a relationship was to cease". These concerns only create further doubt as to the long term stability of Eagle, particularly as it is the Buzzard Group that appears to account for the £9.9 million debt indicated as owing to Eagle in the most recent management accounts.
- I therefore accept Mr Charlton's submission as to the wholly unsatisfactory evidence surrounding that alleged debt to Eagle. The material does not allow me to say who actually owes that money or on what terms. Osprey, the ultimate parent, does not have the resources to pay that amount, and it is unclear if they have the liability to do so, given the absence of any such liability on Osprey's part in their own management accounts.
- There is also a suggestion that there is some sort of deferred revenue from Harrier, in the sum of over £8 million. But it is not at all clear to what that relates, since Mr Maclay indicates that Eagle are yet to provide any services for which they have already received that consideration. That suggests that Eagle's own financial health is much worse than has been stated in the management accounts.
- As part of the same general picture relating to all these companies, Mr Pilgrem contends that the Buzzard Group is in severe financial difficulties and members of that group are likely to put their own interests before those of Eagle. In addition, neither Buzzard nor Harrier have filed accounts at Companies House since 2009. The 2010 accounts are now 8 months overdue, in breach of the Companies Act. Buzzard's consolidated statements, not confirmed by auditors, show losses, liabilities and a deficit on shareholders funds of €16.6 million.
5.5 CONCLUSIONS AS TO IMPECUNIOSITY
- For the reasons set out in paragraphs 25 to 30 above, it is agreed that Eagle are balance sheet insolvent. On that ground alone, I consider that the necessary test under CPR 25.13(2)(c) is made out. However, if the test also requires me to find that Eagle are insolvent on the basis of being unable to pay their debts as they fall due, I do so find, for the reasons set out in paragraphs 31 and 32 above.
- The evidence relating to the final financial position of the holding companies Osprey and Kite is equally troubling: see paragraphs 34 to 38 above. Neither of them is in a position to pay cash to meet an order for security for costs. The inter-company relationships, and thus the debts and liabilities produced by those relationships, are entirely unclear and undocumented.
- The same points can be made of the Buzzard Group (see paragraphs 39 to 43 above). Indeed, they appear to be in a worse financial position than the Eagle Group and have not filed accounts for any period since December 2009.
- In the light of those conclusions, I agree with the submission of Mr Charlton that, on analysis, the intercompany relationships in this case, which obviously underpin any potential future profitability on the part of Eagle, are not unfairly described as a "house of cards".
- Accordingly, the first stage of the test under CPR 25.13(2)(c) has been made out, and I go on to consider the second stage.
6. DISCRETION
6.1 Preliminary Matters
- It is appropriate to deal first with two matters which can be highly relevant to applications of this sort but which, in my view, do not arise here at all.
- First, there can be no criticism of the timing of the application. It certainly was not made late. I consider that it was appropriate for the application to be limited to the next stage of Falcon's costs, rather than their costs as a whole. In a case like this, it is almost always proportionate to apply for security in stages.
- Secondly, I can reach no view as to the underlying merits of either the claim or the defence. This is not a case where there are any important admissions, nor where there is a straightforward point of construction, or some legal principle which indicates an inevitable outcome to part or all of the case. No offers or specific elements of any without prejudice negotiations have been drawn to my attention. Accordingly, I must approach this application on the basis that both claim and defence are genuine and therefore equally likely to succeed.
- In reaching that conclusion I therefore reject Mr Charlton's written submission, not developed orally, that Eagle's claim on causation and loss and damage is so weak that I should take that into account in reaching a conclusion adverse to Eagle. Whilst I accept that their proposed amendments may be of significance, it is simply not possible for me to conclude that this demonstrates such a weakness on the part of Eagle that it should be taken into account for the purposes of this application.
6.2 Oppression
- One important factor in applications of this type can be the question of oppression: whether an order for security for costs will stifle a genuine claim. In my view, that does not arise in this case.
- It is not suggested in any of Eagle's evidence that, if an order was made, Eagle would be unable to provide security, thereby losing their ability to pursue this claim. On the contrary, Mr Maclay's principal argument is that an order for costs could be met, albeit by Kite or Osprey, rather than by Eagle themselves.
- Although Mr Dennys maintained that this was a case of oppression, he was careful not to say that an order for security would stifle the claim. The highest that he put it was at paragraph 17 of his written submissions. There he referred to the long-term relationship between the parties and Eagle's commitment under the Wholesale Agreement to a significant minimum usage commitment. He went on:
"On the other hand, Falcon knows full well that Eagle is a lean operation with few external creditors but with limited working capital. Falcon is therefore well aware that Eagle would find it impossible to provide security in the sum claimed from its own resources. Eagle invites the court to conclude that Falcon is seeking to use the application for security as a means of stifling a genuine claim."
- I do not reach the conclusion suggested by Mr Dennys. I do not believe that it flows from his submissions. In essence, he was doing no more than saying that Eagle cannot provide security from their own resources, a point which has never been in issue and is the principal reason for this application in the first place. There was nothing to say that an order for security being provided through Kite or Osprey would have any adverse effect on the progress of this claim.
6.3 The Possible Responsibility of Falcon
- Another factor which the court must take into account concerns the potential responsibility of the defendant for the claimant's financial difficulties. If the defendant's non-payment of the sums in issue in the proceedings has caused the impecuniosity, or the defendant has in some way acted in a way to cause the claimant substantial loss, then that would be an important factor to weigh in the balance against making the order sought.
- Mr Dennys submitted that the drop in numbers of Eagle's customers has been attributed by Eagle to the matters complained of in these proceedings. However that is merely an assertion. There is no evidence before me that Falcon is responsible for Eagle's financial problems, either in this or in any other way. On the contrary, the evidence shows that Eagle is a start-up company suffering from the usual liquidity difficulties that most young companies face. As a result of the Wholesale Agreement with Falcon, they are generating some profits and those are reducing their liabilities. Thus, this is not a case where Falcon can be blamed for Eagle's inability to meet any order for costs that might be made.
6.4 Conclusions As To Discretion
- If no order for security for costs is made, Falcon face the prospect of incurring significant costs which there is reason to believe Eagle will not be able to re-pay if their claim is unsuccessful. If an order for security for costs is made, the evidence is that Osprey or Kite will provide security so as to allow Eagle to pursue their claim. That is what Mr Maclay says in terms. All other matters (merits of claim, responsibility for the difficulties and so on) are essentially neutral.
- In addition, the fact that there is an ongoing contract between the parties, which is said by Mr Dennys to be a relevant matter, does not seem to me to impinge upon my general discretion. After all, despite that extant contract, and despite the very significant rights and obligations to which it gives rise on both sides, Eagle have chosen to issue these proceedings. In those circumstances, it does not seem to me fair to describe Falcon's consequential application for security as "commercially senseless", as Mr Dennys did.
- In all the circumstances, therefore, it seems to me that it is just to make an order for security for costs. Indeed I would say, on the material before me, that it would be unjust not to make such an order.
7. THE AMOUNT AND THE MANNER OF SECURITY
7.1 The Amount of Security
- There are two broad areas relevant to the amount of security. The first concerns the various contractual arrangements which Eagle say provide at least some security to Falcon already. The second concerns the costs information provided and the apparent inflation in Falcon's alleged costs.
- As to the contractual arguments, I do not consider that they provide any proper security for Falcon's costs.
a) Pre-Payment
- The Wholesale Agreement operates in this way: Eagle buys credit from Falcon in bundles so that its customers can use the Falcon network. This pre-payment is not an asset, nor is in any way relevant to security for costs. Indeed, it seems to me that that particular point was accepted in the correspondence. In Eagle's letter to Bird and Bird of 25 April 2012 they say:
"Eagle currently has a very large balance in the prepay account with Falcon of approximately £2 million. This is not directly convertible into cash so cannot be claimed as an asset. However, it can be used to provide service, which will in turn yield revenue, which in turn can yield surplus cash."
- It seems to me that that is an accurate summary of the position and explains why that pre-payment could not be taken into account by way of security.
b) MTR
- These are the termination charges credited to Eagle's account when Falcon terminate the calls their customers have made to customers on other networks. The MTR charges reduce the amount of Eagle's minimum usage commitment, which is set at £10 million per year. Thus, the MTR charges are not an asset in Eagle's hands and could not be a source of security for any costs incurred by Falcon in these proceedings.
c) Deposit
- There is a deposit by Eagle of £120,000 provided for in the Wholesale Agreement. That covers any claims made against Eagle by Falcon under the Wholesale Agreement or for breach of that Agreement by Eagle. It seems to me that that is an entirely separate arrangement from any liability that Eagle might have to pay Falcon's costs in these proceedings. It is a stand-alone contractual agreement. Again, that is not something which I should take into account when fixing the amount of security.
d) Costs Information
- However, in relation to the apparent costs inflation, I am much more sympathetic to Eagle's position. In my view, the costs figures on which this application is now made have been exaggerated and ought not to form the amount of any order made by the court.
- At the CMC on 4 April 2012, Falcon estimated that their total costs to the end of the trial were about £920,000. Of that, some £220,000 was said to be likely to be incurred down to the end of disclosure. That was despite the fact that in the original letter seeking security, a sum of £290,000 had been identified down to that same stage. However, those two figures were at least broadly consistent.
- Consistency was wholly lost when the actual security application was made later in April. Then, the sum sought had increased to £610,000. As I have indicated, it is now said to amount to some £750,000 odd. Moreover, the stated reason for these increases, namely the work done on the injunction application, can only be a partial explanation: the figures indicate the injunction application was responsible for no more than £265,000 odd, even on Falcon's own figures.
- I am concerned about these wildly fluctuating costs figures. Of course one understands that, in cases of this type, the costs are difficult to estimate and costs will often increase from the estimates originally given. But the purpose of providing costs estimates at the first CMC is for the court to obtain a realistic guide to what the overall costs are likely to be. In that regard, I repeat the point about the Costs Management Order (paragraph 6 above). Had there been time for that exercise to have been done at the CMC, it seems to me more likely than not that Mr Justice Ramsey would have accepted the costs estimate put forward by Falcon in the total sum of some £920,000 odd. He would have been likely to make a Costs Management Order which would have generally fixed their costs recovery, save for changed circumstances and the like, in that sort of figure. That would then have fixed their costs down to disclosure at about £220,000, subject to unforeseeable events.
- Dealing specifically with the point about the injunction application, I am sympathetic to Mr Dennys' suggestion that the £265,000 odd referable to that application should be treated, for the purposes of this application only, as a separate self-contained incident of costs, to be left out of account for the purposes of calculating the right amount for security for costs. It was a stand alone issue. Obviously, the confidential terms of the settlement prevent me from embarking on a more detailed assessment of the merits of that application. Whilst I accept Mr Charlton's point that, with an order of costs in the case, no more detailed assessment may be possible or justified, I still consider that, in the exercise of my discretion, it would not be appropriate to take that matter into account when assessing the level of security to be ordered by the court.
- Taking all those points into account, I consider that a figure of £295,000 is the just and proportionate and the reasonable figure for the order for security for costs. It is in line with Falcon's original application for security made in correspondence. It is in line with their estimate for their costs down to the end of disclosure (adding something for unforeseen events), which was considered by Mr Justice Ramsey at the CMC and which could well have formed the basis of a Costs Management Order. The figure also leaves out of account the increase in costs due to the injunction application and, perhaps more importantly, it excludes what I consider to be the unexplained and unreasonable increase in the costs estimate provided by Falcon over the last 3 months.
- I consider that, in the round, the figure of £295,000 is not oppressive, notwithstanding the tight margins of the market in which Eagle and the rest of the Group now operate. No higher sum, it seems to me, is justified or proportionate at this stage.
7.2 Manner of Security
- It follows from my conclusions at paragraphs 34 to 43 above that I do not consider that a parent company guarantee from Kite or Osprey, or indeed any other company controlled by Mr Allirajah, would represent sufficient security. There would be too many genuine doubts as to the value of such a guarantee.
- Security should therefore be given in the usual way; that is to say by the payment of a sum into court, or by the provision of a simple bank guarantee. I would give Eagle 28 days either to pay the sum of £295,000 into court or to provide a bank guarantee in the same amount.
